Whipping the horse to death

| July 25 2011
Christopher Cook

http://4.bp.blogspot.com/_473nrD5vEv8/S82GAHSYzgI/AAAAAAAACd4/P-r1GDTUfSU/s1600/draft-horses.jpgCan capitalism survive the welfare state?

Part 1

Earlier, I posted a link to and excerpt from Arthur Brooks’ excellent piece The Debt Ceiling and the Pursuit of Happiness. I’d like now to examine some of his points, and use the piece as a launching point for further discussion.

Brooks makes a trenchant point right away:

. . . before they succumb to too much caution, budget reformers need to remember three things. First, this is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism.

Quite so, though I do have to quibble with the 50-year figure. This trend is a part of a leftward lurch that the whole of Western Civilization took at the beginning of the 20th century. Nothing happens overnight, and so it’s hard to fix a precise date. Interest in statism arose before the turn of the century. It took root under Wilson; it sprouted under FDR (Social Security, New Deal, etc.); and the plant really started to spread like dandelions in spring about 50 years ago (Great Society, etc.). Personally, though, I would go back to FDR, which is when the change was dramatic and, while not irreversible, was certainly strong enough to take hold for a while. And that while is about 80 years now.

That quibble may seem minor, and it is directed at a more brilliant man than I, but I think it is important for us to be aware of the provenance of statism, in all its manifestations.

But Brooks’ larger point is true and essential, for several reasons:

  1. Statism is an ideology. Political parties are just vehicles for ideologies, and the ideologies they carry do change. It is essential that people understand the ideologies themselves.
  2. While Republicans have mostly fought the trend, a few have participated in its propagation.
  3. People need to know where we’ve been going in order to know how to bring us back. Just calling it a fight between political parties is short-term thinking that misses the point. We need to define and then discredit statism in the minds of people, so that they can resist our continual lurch in that direction. Otherwise, we’re just lost in a constant struggle of partisan politics, and the vast American middle tunes out, and never gets the real point.

Next . . .

Second, it is a moral fight, not an economic one.

Brooks elaborates on this later in his piece, and I will excerpt therefrom, and analyze, in part 2. For now, he makes the point that the fight against statism must happen on moral grounds in order to be effective. Beyond that, though, it truly is a moral issue. Statism doesn’t work, it makes men less free, and it is a moral crime.

Third, this is not a fight that anyone can win in the 15 months from now to the presidential election. It will take hard work for at least a decade.

As an activist and writer, this has been a point of mine for years. The left understands politics as a general struggle, one to be fought in every arena, on every issue, in every field of endeavor and institution, 24/7/365. The right, for its part, has tended to get active at election times and on certain issues, but not to pursue the struggle vigorously as a general, categorical, ideological one. There are exceptions, of course, but that is generally how things have tended to work.

Conservatives need to stop thinking of things exclusively in terms of elections, and we need to understand the generational nature of the struggle. It takes time. The left gets that, and they have had their noses to the grindstone working to change us into a statist civilization for the better part of 100 years. It’s a long-term project to them. Reversing it—and making a case for our preferred system of free markets—needs to be seen as every bit a generational project.

Then Brooks goes on to cite some disturbing statistics:

The Bureau of Economic Analysis tells us that total government spending at all levels has risen to 37% of gross domestic product today from 27% in 1960—and is set to reach 50% by 2038.

Note there that it isn’t just a rise to 37% that is expected to level off. Based on the policy trajectory, it is going to continue going up. It’s not a blip or a temporary increase for a purpose. It’s a trend.

The Tax Foundation reports that between 1986 and 2008, the share of federal income taxes paid by the top 5% of earners has risen to 59% from 43%.

The number of makers shrinks, and they are more greatly burdened . . .

Between 1986 and 2009, the percentage of Americans who pay zero or negative federal income taxes has increased to 51% from 18.5%.

. . . and the number of takers increases, and they bear little or no burden. This is a moral crime, but beyond that—as I have repeated ad nauseam—it is a recipe for economic collapse. If you increase the number of takers in a society, and they bear no burden—and then you promise them even more benefits—then you have to increase the burden on an ever-shrinking number of makers. It is not possible to sustain such a trend.

Brooks then asks the 14 trillion dollar question, and offers some prognostication:

Where will it all lead? Some despairing souls have concluded there are really only two scenarios. In one, we finally hit a tipping point where so few people actually pay for their share of the growing government that a majority become completely invested in the social welfare state, which stabilizes at some very high level of taxation and government social spending. (Think Sweden.)

I do not think that the Sweden scenario, if it happens at all, can be sustained for long here.

Sweden is often cited as an example either of a successful socialist state or of a successful example of welfare-state capitalism. The former claim is simply false, for reasons explained by me and several Swedish economists here.

Simply put, when Sweden took a hard left turn in the 1970s, it was able to subsist on the wealth produced from the previous 100 years of free market abundance and success. Thus, in the subsequent decades, socialist apologetics often pointed to this (newly) socialist nation as an example of socialism’s success. Unfortunately for those apologists (and the Swedes), it took a mere two decades for Sweden to exhaust the benefits bequeathed them by a century of capitalist growth. In an effort to right their listing ship, they re-instituted many market reforms, and Sweden is once again on the right track in many ways.

Thus is disposed the socialist claim. The veracity of the latter claim—that Sweden is a successful example of welfare-state capitalism—is more mixed. Several issues are at play here:

1. As you can learn from listening to the Swedish economists linked in this article, Sweden enjoys several inherent advantages that make such a society more likely to succeed. I won’t belabor those here; I highly recommend that you hear it from the experts.
2. Even still, there is a question about how long that it can continue, even in Sweden. The problem with analysis of a situation based on the current snapshot is that the future is not known. How long welfare-state capitalism can last, in Sweden or elsewhere, is an open question.

We can refer to history and know that in the case of full-blown totalitarian socialism, it can take several decades for collapse. Without change, collapse is inevitable because it is not a workable system, but even still, it can subsist—on established institutions, previously created wealth and infrastructure, borrowing, and finally on propaganda and wishful thinking—for a few generations before it falls apart. It took 74 years for the USSR to crumble.

Welfare-state capitalism, theoretically, should be able to last even longer. We have stronger institutions, a generally free economy and people, and far greater stability and durability. The welfare state may be a heavy yoke, but it’s being hitched to a much stronger horse.

In America, we’ve made it for eight decades, but the cracks are now beginning to show. Countries like Greece and the United Kingdom haven’t even made it that long. Japan, once expected to dominate the world economically, has been suffering from its leftward lurch for quite a few years now.

Whether welfare-state capitalism can survive for 50 years or 80 or 100 is an open question. However, as I state above in the takers and makers formulation, it is not permanently sustainable. I argue as much in Rome, America, and the Collapse of the Welfare State. Indeed, as soon as you have begun borrowing to sustain either the welfare state or any of the other functions of government that cannot be funded because of excessive welfare-state costs, I think it is fair to say that welfare-state capitalism has already collapsed. You have already crossed that crucial line where whatever you are promising to your citizens, there aren’t enough makers to provide it.
3. There is one more reason why Sweden may enjoy a longer run at its experiment in welfare-state capitalism. It’s a bit more inside-baseball, but according to the Swedish economists whom I have used as resources, Sweden taxes consumption more heavily than income. This is one of those open questions that mankind has not yet answered dispositively, viz., the debate between the flat tax people and the fair tax people. However, I have started to lean towards the belief that taxing consumption may be a better, more sustainable way to go. In Pick your taxation poison, I argue that since taxation always punishes something, it is important to determine, if possible, what is the least damaging thing to punish.

–labor and income
–investment and profit
–saving
–trade
–commerce/consumption

In the end, I suspect that a broad tax base where consumption is “punished” will be the least damaging to the health of an economy. Perhaps welfare-state capitalism, like that in Sweden, could subsist for a while longer using such a system of taxation.

In the end, though, I do believe that it cannot be sustained forever. Eventually, the chickens come home to roost. Unless the welfare-state is assiduously well-constrained to only those in the greatest need, it will by its nature—and by human nature—expand. I am simply not sure I believe that Brooks’ first scenario can work here in the U.S.. It can happen and continue for a time, but not forever.

Brooks’ second scenario is also grim:

In the other scenario, our welfare state slowly collapses under its weight, and we get some kind of permanent austerity after the rest of the world finally comprehends the depth of our national spending disorder and stops lending us money at low interest rates. (Think Greece.)

In other words: Heads, the statists win; tails, we all lose.

I think this scenario is more likely to come to pass, though perhaps not this year. That being said, it may not need to be as grim as Brooks suggests. It will be hard, yes, but the austerity need not be permanent. High interest rates would surely sting, but if we were not adding any more to our debt, and if we pursued growth policies, we could surely pay down that debt.

Did I just say . . .

if we were not adding any more to our debt,
and
if we pursued growth policies?

You may say I’m a dreamer, but I am not the only one. If the welfare state does collapse in America, and it does take the economy down with it (to whatever degree), Americans will not lay down for it. They will demand a real change, and that demand could conceivably make the collective shout of the historic 2010 elections sound like a whisper in comparison.

The one key in that scenario would be to get out in front of the narrative. If welfare-state capitalism collapses, the left will be working overtime to blame it on capitalism rather than on the welfare state. They will have yoked the horse with a far-too-heavy boulder, whipped the horse to death, and then blamed it all on the horse. And with their control of the narrative-making machine, they might just get away with it.

If America is to survive what is coming, success may depend on getting out in front of that issue now. Make the people know that the collapse is coming, and make sure they know whose fault it will be. Make the left own it now. Otherwise, we may find ourselves being told that the only solution to the disaster the left wrought is to move even further left . . . adding another boulder upon the poor horse’s grave.

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  1. [...] you were to go back and read Whipping the horse to death and Rome, America, and the Collapse of the Welfare State, you would see that I agree with that [...]