When is a Clean Water Act Permit Needed?

The issue of whether a Clean Water Act permit is needed when a pollutant originates from a point source and reaches a navigable water of the United States by virtue of groundwater, a non-point source, was argued Nov. 6, 2019, in the U.S. Supreme Court.

The case is the County of Maui v. Hawaii Wildlife Fund and Sierra Club. In the suit, the Pacific Legal Foundation argues environmental groups are unjustifiably attempting to expand the CWA’s authority. This nonprofit group is attempting to stop the 4th and 9th Circuits’ attempt to expand the reach of the CWA to the regulation of groundwater.

Lawyers argued that if Maui County loses this case to a group of environmental activists, there will be a new threat for tillage and animal agriculture. Fertilizers, pesticides, herbicides and manure are applied to farmers’ fields. A fraction of these products can seep into groundwater.  One brief claims, “…farmers likely face the biggest risk of being prosecuted for groundwater contamination due to regular farming practices, like fertilizing crops, because fertilizers have the ability to soak into the ground and, thus, groundwater.” Those who participate in agriculture have always known this discharge was treated as a non-point source discharge and exempted from CWA permitting.  Agriculture and farming have an agriculture stormwater runoff pollution exemption.

The case

Maui County injects treated wastewater into wells which are approximately a half mile from the Pacific Ocean. This treated wastewater was discharged into groundwater not “from” a point source. The groundwater eventually conveyed the treated wastewater to the Pacific Ocean.

Environmental groups argued that the pollutants discharged by Maui County traveled through a “confined and discrete conveyance,” such as groundwater, to a navigable water, the Pacific Ocean. Two U.S. Circuit Courts of Appeal have determined that a person need not directly add a pollutant to a navigable water to be held liable under the CWA. Another U.S. Court of Appeals claimed a person is liable under the CWA if a person discharges pollutants into the ground and those pollutants eventually make their way to a navigable water. These federal courts believe that a pollutant need only come from a point source. In Maui County, the pollutant was from wells. For agriculture, it would be from the farm field.

Pending decision

If the Supreme Court does not support Maui County, it will be declaring the CWA regulates pollution that reaches navigable waters through groundwater. The CWA states “…any person who directly discharges pollutants into a navigable water without a permit violates federal law.”

The U.S. Supreme Court needs to stop the lower courts’ improper expansion of the CWA. The Supreme Court needs to stop the CWA from being used to burden agriculture and land owners throughout the United States. Justice Alito, in another CWA case, states, “The combination of the uncertain reach of the Clean Water Act and the draconian penalties imposed for the sort of violations alleged in this case still leaves most property owners with little practical alternative but to dance to the EPA’s tune.”

We will know the outcome of this case by next June. Even though this case comes from Hawaii, it will have a major impact on tillage and animal agriculture.

This commentary was originally published in the November 19 edition of the online Farm Futures. 

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Should U.S. Consider Modern Monetary Theory to Improve Economy?

The U.S. budget deficit reached $984 billion in 2019. That’s 4.6% of gross domestic product.

Such a large deficit should cause interest rates to rise, according to traditional economic theory, because government debt “crowds out” private sector debt.

Since there is a limited supply of money, the price of borrowing (interest rates) goes up for all borrowers.

This is undesirable because higher interest rates slow economic growth. Fewer people can afford a mortgage or investments become too costly for businesses.

According to Modern Monetary Theory, however, this is not the case.

This theory, commonly called MMT, postulates that countries such as the U.S. that issue their own currencies can simply issue more money to avoid the crowding-out problem.

MMT is drastically different from traditional economic theory and is not well-accepted by mainstream economists.

There are variations to the assumptions behind MMT, but many supporters of this theory see government spending as a way for the government to put money into the economy.

They acknowledge that inflation can accelerate if there is not enough supply or workers to satisfy all the spending.

But the potential acceleration in inflation can be headed off by increasing taxes and thus taking money out of the economy. When there is less money in the economy, the potential for bidding up prices diminishes.

Consequently, it is not necessary for the Federal Reserve to sell government bonds in order to increase or decrease interest rates to stimulate or restrict economic growth as it currently does to carry out its dual mandate of stable inflation and full employment.

Under MMT, the Fed maintains a 0% interest rate, which is neither restrictive nor accommodating to economic growth. Congress and the president take over the dual mandate with their fiscal authority.

In a sense, the role of the central bank and monetary policy would be eliminated under MMT, and fiscal policy would be the only tool to manage the national economy.

Regarding the full employment mandate, rising unemployment rates are the result of the federal government not spending enough and collecting too much in tax revenue.

During times when inflation is picking up and the government needs to raise taxes to slow it down, some people will lose their jobs.

The problem of getting back to full employment is resolved by a job guarantee.

Individuals who can’t find jobs in the private sector would be given a job in the public sector and paid a minimum wage that is managed at the local level but funded by the federal government.

In addition, paying minimum wages helps to keep wage pressures down.

MMT was developed by Warren Mosler, who has a bachelor’s in economics from the University of Connecticut. He worked as a Wall Street trader and later founded a hedge fund. In the 1970s, he began to develop the concepts that underlie this theory. In 1993, he published “Soft Currency Economics” that gained the attention of some economists.

Presidential hopeful Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez have further popularized MMT by arguing that their spending proposals will not cause inflation to accelerate under this theory.

To date, MMT is viewed with caution by most economists.

Tim Sablik, an economist with the Federal Reserve Bank of Richmond, wrote in a recent Richmond Fed magazine article how Sebastian Edwards of the University of California at Los Angeles argues MMT had been tried in various Latin American counties with disastrous results.

Sablik also referenced Nobel Prize-winning economist Thomas Sargent of New York University who provided examples from Europe after World War I that resulted in hyperinflation.

In a Bloomberg news article, Federal Reserve Chairman Jerome Powell made it clear that he is no fan of MMT: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong.”

chmura-100Email this author

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Biden’s Disappointing Infrastructure Plan

With the 2020 presidential campaign ramping up, many of the Democratic candidates have released policy positions for primary voters. Transportation, which is not considered sexy, has received little attention thus far. One exception is former Vice President Joe Biden, who released an infrastructure plan in mid-November. Unfortunately, his current transportation plan somewhat resembles the Obama administration’s American Recovery and Reinvestment Act stimulus plan to create jobs during the Great Recession. 

I had high hopes for Biden’s plan. As the leading moderate Democrat in the race, and somebody with a track record of prioritizing infrastructure, I hoped for a plan with a national focus, sensible and cost-effective transit, and realistic funding and financing methods (tolling, mileage-based user fees, public-private partnerships, etc.). Instead, Biden’s plan largely focuses on local—not national—priorities, doubles down on the Obama administration’s interest in building high-speed rail, and relies on a fantasy tax on billionaires.

Biden’s $1.3 trillion proposal, described by his campaign as a plan to invest in the middle class, combines transportation, energy, resilience, water, broadband, and schools. Each of the components is focused on three goals: creating union jobs, reducing greenhouse gas emissions, and revitalizing communities. It is unclear how much of the total funding transportation would receive. Transportation is divided into six categories: highways, rail, transit and planning, smart cities, aviation, and freight. 

The plan seems targeted at public employee unions, environmentalists, and working-class communities. By focusing on these three groups, the plan ignores the broader message that transportation improves America’s competitiveness and grows the economy. 

I don’t agree with strengthening labor protections, but even for those who do, this is a secondary issue in transportation. We shouldn’t build transportation projects to create a bunch of temporary jobs; we should invest in transportation to improve mobility and the economy, and then the robust economy creates jobs. Further, Biden’s plan reads as though we are still in the throes of the Great Recession of a decade ago, not at the record-low unemployment we are now experiencing. 

The plan includes some roadway projects, but even that funding seems intended more for cycling and walking than for cars and trucks. The document justifies providing direct funds to cities (rather than state transportation departments) based on the claim that cities and towns own most of the roads. Yet in several states such as North Carolina and Virginia, the state owns all of the roadways. And in most other states, the state, not the city, maintains most of the higher-volume, high-priority roadways. 

The plan assumes that investing in high-speed rail (HSR) and light rail would reduce greenhouse gas emissions. Yet, studies have shown that bus, not light rail, is more effective at reducing greenhouse gas emissions since most light rail vehicles have few riders outside of peak periods. High-speed rail is extremely energy-intensive to build. The California high-speed rail project would have needed to operate for 71 years at average capacity to neutralize the emissions needed to build the line. If Biden’s goal is to reduce greenhouse gas emissions, there are much easier and cheaper ways to do so than building HSR and light rail.

The inclusion of light rail and HSR won’t help working-class communities, either. Building light rail lines typically leads to gentrification, which increases home prices and forces low-income minorities to move. (The new residents use light rail less frequently than the displaced residents). HSR is frequented primarily by wealthy business travelers. Lower-income residents use intercity buses, which benefit from improved highway conditions, not rail upgrades. 

But even if we assume that Biden’s plan to, “Spark the second great railroad revolution,” is good policy, the proposed implementation is flawed. The plan proposes to shrink the travel time from Washington, DC, to New York in half, expand the Northeast Corridor to the south, and construct a nationwide end-to-end high-speed rail system. The plan seems like a reprise of the Obama administration’s failed HSR vision. One reason that approach failed is that it spread federal funding to more than 35 states instead of targeting a few mega projects. As a result, no actual HSR lines were built. And with a cost of at least $100 million per mile, most states were left with lines that they could not afford to build.

It’s not just my impression that the Obama administration’s HSR approach failed. Reports from the Congressional Budget Office, Congressional Research Service, Government Accountability Office, and Office of Management and Budget highlighted the drawbacks of this approach. The most relevant criticism came from Rail Forward, a high-speed rail advocacy group. In 2016 testimony before the House Oversight Committee, President Tom Hart explained that while his group strongly supports HSR, the Obama administration’s plan was a case study of how not to build high-speed rail. 

Perhaps the worst part of the plan is its funding source. Biden says every cent of his $1.3 billion plan would be paid for by tax increases on the super-wealthy and corporations. The plan appears to move away from the longstanding users-pay/users-benefit mechanism. The users-pay principle is fair, proportionate, self-limiting, predictable and an investment signal. It is supported by almost every transportation stakeholder in the country. Users-pay has worked well at the federal and state level for more than 50 years. Most importantly, surface transportation has a dedicated user tax free of the political dynamics in the general budget process. Under Biden’s plan, transportation would be competing with other policy areas since it is mathematically impossible for billionaires to pay for all government programs. The last time transportation competed against other policy areas, in the 2009 stimulus, transportation received only five percent of the funding, well below its proportionate share, which might explain the strong bipartisan support for the users-pay principle. 

I realize that it is early in the campaign season, and his proposal is in part a political document. But I would urge the Biden campaign and all Democratic candidates to develop an implementable plan that is realistically funded and focuses on genuinely federal transportation priorities.

This commentary originally appeared in the December 2, 2019 edition of Surface Transportation Innovations Newsletter.

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“Conformity” Tax Reform Debate Should Return for 2020 Session

Virginia taxpayers will save almost $600 million over two years as a result of the increase in the state standard deduction, a step proposed last year by the Thomas Jefferson Institute for Public Policy. That is a fresh estimate released November 21 as the Senate Finance Committee heard an after-action report on the 2019 tax conformity issue.

It is not a huge dent in the almost $10 billion the state collects in individual income taxes over two years but can be viewed as a tax reform glass half full. Further tax reform does not seem to be high on the General Assembly’s 2020 agenda, but it should be. Virginia has a long history of complacency and inertia on tax policy, changing only when forced.

The higher standard deduction was made possible by a windfall of state tax revenue created by conforming to changes in federal income tax rules in 2018. The General Assembly could have kept the entire windfall for spending initiatives. The Jefferson Institute led a campaign pressing for corresponding state tax reforms. The fresh data is now reducing the estimated size of that windfall going forward, but additional tax reform is still possible.

The 2019 tax reform legislation created a Taxpayer Relief Fund that is intended to hold any additional revenue in the windfall generated by conforming to the new federal rules and not returned to taxpayers, keeping the excess funds segregated and available for additional tax reform. That was something else recommended by the Jefferson Institute and adopted.

The state is now projecting that the various changes made in 2019 are eliminating most of the revenue windfall created by the federal changes, in part because it now estimates much lower income from that windfall than it first projected. After $431 million in one-time refunds this fall, the first deposit into the Taxpayer Relief Fund will be just $24 million, with an estimated $5 million more to be deposited in 2020.

However, using the state’s new and conservative projections, made without much transparency, there are potential Taxpayer Relief Fund deposits of $165 million in 2021 and $183 million in 2022. Those sums create potential for minor tweaks to reduce state income taxes, and again a higher standard deduction or some other help on the low end should be the focus. The 2020 General Assembly should leave the Taxpayer Relief Fund in place and use it as intended.

This year’s increase in the standard deduction provided the most generous tax reform, saving a Virginia couple $173 per year. Because the vast majority of households now take the standard deduction, that amounts to $360 million in tax relief for this year and $236 million more next year. It should have been higher.

Virginia’s standard deduction of $6,000 for a married couple had been unchanged (and eroded in value by inflation) for decades. The Jefferson Institute recommended that Virginia double it, to $12,000 per couple, but the 2019 General Assembly only went halfway and raised it to $9,000. The standard deduction is a portion of income exempt from the personal income tax.

Even at $9,000, Virginia’s standard deduction is substantially below the tax-free income allowed at the federal level or in surrounding states. Because the Internal Revenue Service adjusts its provisions for annual inflation, the 2020 federal standard deduction goes up to $24,800 for a married couple. That means Virginia taxes $15,800 in income which is not taxed at the federal level, a major burden on lower income families, who often owe zero federal income tax. Matching the federal amount would save that couple up to another $900.

The Jefferson Institute recommended that Virginia also start indexing its tax provisions to inflation. A failure to do that in effect creates small annual tax increases. But that was not adopted in the 2019 state tax legislation. It remains a good idea, another good way to expend the Taxpayer Relief Fund going forward.

Increasing the state standard deduction was right in line with the new federal policy, but there were four other tax changes which reversed the federal policies and put Virginia out of conformity. The new committee presentation also provided the latest impact estimates for them, three tax cuts and one tax hike.

Two major business tax deductions, taken away by the federal law but restored by the General Assembly, saved corporate taxpayers about $11 million this year and will save them almost $48 million over the next two years. The largest allows an interest deduction in Virginia which was disallowed at the federal level.

For those individual taxpayer who still itemize their deductions, Virginia will also ignore the new federal $10,000 cap on state and local tax deductions. Allowing Virginians to deduct all state and local taxes saves them (and costs the state) $97 million over the next two years. This was a nod toward the regions with the highest housing tax amounts, but some taxpayers everywhere will benefit.

The three tax cuts other than the standard deduction saved taxpayers another $145 million over two years, but their benefit will be far smaller than the $181 million in revenue collected by a Virginia-specific wealth tax also created in the legislation.

Congress eliminated a federal wealth tax provision which limited the deductions allowed to high income taxpayers, but effective with this year the state put it back in place for state returns only. The rule is known as the Pease Limitation. To trigger the limitation the taxpayer needs income of about $325,000 or more, and as income grows, the deductions allowed shrink.

Even that high trigger will capture enough Virginia taxpayers that Virginia expects to collect $108 million off the Pease Limitation this year and another $73 million next year. It takes back about one-third of the total savings from the higher standard deduction.

With its low standard deduction, Virginia taxes low income workers more heavily than its neighbor states, and with the Pease Limitation back in place it puts an additional burden on its richer citizens. Neither makes Virginia more competitive or attractive.


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Big Minimum Wage Increase Bad for Workers

It doesn’t make sense to ban jobs that pay a living wage, just because an employer can’t afford to pay a still higher wage. But that is what a $15 minimum wage does in regions where living costs and wages are low. There are cheap regions to live in where $11 an hour supports a decent lifestyle. If someone can afford decent food, clothing, and housing on $11 an hour, and their employer can’t afford to pay them more than $12 an hour, it is pointless and cruel to ban their job just because it pays less than $15 per hour.

But that is what a $15 minimum wage does. It bans jobs that pay less than $15 per hour, regardless of whether an individual employer and worker have a good reason for a lower hourly wage.

Virginia is now poised to join seven other left-leaning states, such as New Jersey, in imposing a $15 minimum wage. The incoming majority leader of the state senate, Richard Saslaw, D-Springfield, has introduced a bill to increase the state’s minimum wage to $15 by 2025, and then adjust it for inflation in future years. Every Democrat in the state senate has already voted for a similar bill in the past, and Democrats took control of Virginia’s legislature this November.

A high $15 minimum wage is a bad idea, especially for Virginia. It is one thing to impose a high $15 minimum wage in a state like Massachusetts or New Jersey, where the typical wage is already high, and virtually the entire state has a cost of living higher than the national average. It is quite another to impose such a high minimum wage in a state like Virginia, where many counties have low living costs and low wages to match.

No state has ever adopted a $15 minimum wage when that is above the median hourly wage in a substantial number of its counties and towns. But Virginia is poised to do just that.

A uniform statewide $15 minimum wage makes no sense in Virginia. Economically, Virginia is like two different states stitched together, that have very little in common. Its wealthy north and east are much like New Jersey. But its south and west are more like Alabama, with low living costs and wages. A house costs only a tenth as much in Southwest Virginia’s Buchanan County as it does in Northern Virginia’s Arlington County, and only a seventh as much in Southwest Virginia’s Grayson County as it does in Arlington. Not surprisingly, wages are lower in the counties that are cheaper to live in, partly because people need less to live on. Counties like Grayson, Appomattox, Mathews, Patrick, Floyd, and Northampton have median hourly wages that are less than $15 as a result.

In regions where the typical worker is paid less than $15 per hour, employers cannot possibly pay all their employees — including entry-level, unskilled workers — over $15 per hour. In such areas, employers typically don’t make more than a couple dollars per hour in profit on an employee. For example, grocery stores have a typical profit margin of between 1 percent and 3 percent per item, a small profit margin which can be wiped out by even modest wage increases. So if they are currently paying their average employee $12 per hour, they are not going to be able to raise that to $15 per hour — especially not for bottom-level, newly-hired employees who are still learning the ropes, and need help doing their job. Retail stores have small profit margins: When Venezuela imposed a large increase in its minimum wage, 40% of its stores were forced to close, because they simply could not afford to pay the higher wage.

A $15 minimum wage is popular because people wrongly believe that companies have lots of spare cash that they can spend on increased wages. The public mistakenly believes that the average corporate profit margin is a whopping 36%.

But the actual profit margin is much tinier for businesses. The average profit margin for companies that are not banks or financials is 6.9%; even if one adds in banks and financials (which pay almost all their workers over $15), it’s still only 7.9%. A 7% profit margin doesn’t give most companies enough money to raise wages for all, or even most, of their workers by more than a dollar per hour. But in a low-cost area where the average wage is below $15 per hour, that’s exactly what a $15 minimum wage requires. It requires that, even if there is no reason to think that a manufacturer will be able to pay that increased wage. It can’t, because it is competing with companies in other states or overseas that pay a lower wage. So it can’t pass the cost of a big wage increase on to its customers, which is the only way it could possibly afford the increase.

Economists say that a $15 minimum wage is a bad idea, because it will eliminate large numbers of jobs. As a think-tank notes, a “new poll of professional economists finds 74% of respondents opposing a $15 per hour minimum wage…84% believe it would have a negative impact on youth employment levels.” That included Democratic and independent economists, not just Republicans: only 12% of the economists polled were Republicans. Even the minority of economists who support a $15 minimum wage often concede that it will increase unemployment. An economist at Moody’s estimated that up to 160,000 jobs will be lost in California’s manufacturing sector alone from its gradual increase of the minimum wage to $15.

Democratic politicians argue $15 per hour is needed for a “living wage,” but this is untrue, because a family with two $12 per hour wage earners can readily support themselves, and their children to boot, in most of the country. In regions that are cheap to live in, people can live on even less, like $10 per hour. Thrifty people can make do with far less: two decades ago my wife was paid only $6 an hour working for the Embassy of Gabon in Washington, D.C., a rather expensive area, yet she managed to save a third of her monthly paycheck, by sharing a cheap, two-bedroom apartment with a friend. I saved a lot of money even while working for less than $15 per hour and living in Northern Virginia.

It’s costly for a state to raise its minimum wage a lot, because the federal government subsidizes low-wage workers to encourage employment, and takes away those subsidies when their wages rise a lot, or when they lose their jobs. That includes earned-income tax credits (EITC). EITC payments phase out as a worker’s wages rise, and totally disappear when the worker loses her job (only people with jobs qualify for EITC). When minimum wages rise, most affected workers either lose their job; or have their wages rise if they keep their job. Either way, they receive less federal money in the form of EITC. Less money in workers’ pockets means less money to spend on their families and in their communities. In low-wage areas where lots of workers receive EITC, a minimum wage increase increases the costs of employers (who have to pay higher wages to fewer workers), but doesn’t provide a corresponding benefit to workers (because increased wages to some workers are more than offset by loss of federal subsidies to workers like EITC, and by lost wages to other workers who lose their jobs). The increased cost to employers harms the local economy because employers, like workers, spend money in their community. Small business owners spend less on consumption and business investment when minimum wage hikes slash their profits. They buy less equipment, hire fewer people to do construction, and do fewer upgrades and renovations that would have provided jobs for people in their communities. Companies do not hoard their profits by burying them in the ground. Instead, they either reinvest their profits in the business, or pay it out to shareholders, who spend or reinvest that money in the economy.

Raising its own minimum wage costs a state critical tax revenue and puts it at a disadvantage compared to other states in attracting jobs. Job losses and business failures from minimum wage hikes reduce state revenue. Meanwhile, much of the benefit of the wage hike to low-income workers who manage to keep jobs at the increased minimum wage is lost due to increased federal taxes and reduced federal earned-income tax credits and food stamps, as a writer noted in the Wall Street Journal in 2016:

[T]he tax implications of going from a $10- to a $15-an-hour minimum wage … [is] very significant. For a family of four with both spouses making the minimum wage, their federal tax will increase from $4,106 to $7,219, payroll tax will increase from $2,579 to $3,869, their earned-income tax credit (EITC) will be reduced from $596 to zero … and the $2,400 food-stamp credit will be lost. Of the $20,800 increase in income in going from $10 to $15 an hour, $7,778 will be diverted to the government, which doesn’t include loss of other income-dependent government welfare programs and added costs due to the resulting inflation. Over one-third of the wage increase will flow to the [federal] government.

As a result, an economically struggling town with lots of low-wage workers tends to have less disposable income, higher prices, and less consumer purchasing power (meaning fewer retail jobs) after a minimum wage hike than before.

Economists predict that wealthy Maryland will lose up to 99,000 jobs due to its gradual increase in the minimum wage to $15. Virginia could lose far more jobs, because it has many more areas with low living costs and low wages to match, than the states that have previously adopted a $15 minimum wage.

Maryland and California, like most states to adopt a $15 minimum wage, have no counties in which the average hourly wage is below $19. Virginia has several counties with median hourly wages below $15, and many such towns. By contrast, the average hourly wage is above $20 in every county in six of the seven states with a $15 minimum wage, such as Massachusetts, New Jersey and Connecticut (in the latter state, all counties have average wages over $25 per hour). In the remaining state that recently adopted a $15 minimum wage (Illinois), only two small counties have average hourly wages below $15 (both smaller in population than any county in Virginia with wages below $15).

So even if $15 were an appropriate minimum wage for those states (which it generally isn’t, as I’ve previously explained), it would be an excessive minimum wage in Virginia.

That is evident from Nevada. It is gradually raising its minimum wage to $12, not $15, because its Democratic legislature and governor recognize that a larger increase would lead to unacceptable job losses. If $12 is high enough for Nevada, it is definitely high enough for Virginia, which has far more low-wage, low-living cost areas than Nevada. Nevada has only one county with a median hourly wage below $20 per hour. By contrast, Virginia has a number of cities and counties with a median hourly wage of $15 or below. Those counties will be hit hard by a $15 minimum wage, which will force businesses to pay all their employees a rate they currently can’t afford to pay even experienced employees.

Big minimum wage hikes can also harm health and safety by pushing cash-strapped restaurants to cut corners and cut staffing. That has a negative effect on cleanliness and hygiene. This was confirmed by a 2017 study by several professors, who compared hygiene in Seattle after its minimum wage was hiked substantially, to hygiene in a city that didn’t increase its minimum wage.

This column first appeared in the Liberty Unyielding blog and Bacon’s Rebellion.

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