My apologies for a long article, but this is a very important topic.
When someone titles his article “The Bankruptcy of Governments” it attracts interest from every friend of economic freedom. If the piece is well-written, it makes a valuable contribution to the intellectual battle over the future of Western Civilization. We need more of intellectually sharp contributions and less of ill-founded demagoguery. Our followers on the political side of the arena are inspired by us, bring our arguments and our analysis to the legislative hallways and try to get laws and budgets passed that will change economic policy and the role of government in the better direction.
If we get it right, all the way from good analysis to good policy decisions, we win – and more importantly: everyone else wins when we all benefit from more economic freedom. The wealthy can invest and improve businesses under more liberty; the poor and needy get more opportunities to improve their lives; creative, entrepreneurial people get more opportunities to build new businesses.
However, if we get our analysis wrong our cause is badly hurt. In theory, it does not matter where the mistake is made in the chain from analysis to legislation, but the closer the error is to the analytical starting point, the more serious the mistake is. Policies that are built on flawed legislative work will have repercussions that are limited to the legislative process; analysts and policy advocates can still do their work without having put their future credibility in jeopardy.
When the error is in the analytical foundation, the entire chain unravels. Bad analysis contaminates analysts, policy advocates, grassroots and activists, as well as elected officials. We who create the analytical foundation therefore have to hold ourselves to the standard that we can’t miss once.
In fact, as I explain in my book Ending the Welfare State, with the big welfare state we have today we will in reality only get one chance to restore economic freedom. If we stumble on the reforms or execute them in such a way that it causes a lot of hardship for many people, we will lose the battle for at least a generation. By that time there won’t be much of a prosperous, industrialized world to save.
For precisely this reason it is crucial that we freedom scholars and analysts do not waste our time – and other people’s time – on analytical constructs that lead to pain, suffering and a certain death for the cause of freedom. This is also why I engage other scholars and analysis whose ambition it is to promote economic freedom, but whose analysis I disagree with.
In the field of economics there is one school that meets all the criteria of purportedly supporting freedom but in reality doing a lot of harm to the cause. That school is, hardly surprisingly, Carl Menger’s Austrian tradition of economics. I have already on a few occasions written about the flaws in Austrian economics and I will continue to do so until its role in the freedom movement has been marginalized to the point of no influence.
This side of Marxism, Austrian economics is the most ill-conceived theory currently at use in the public policy arena. When it was put to work in Russia after the collapse of the Soviet Union, the result was a decade of economic waste, deprivation, abject poverty and collapse of almost every social institution except the Orthodox Church. The demise of a bankrupt government did not automatically, through some spontaneous order, give rise to a well-ordered society with a minimal government. When big government disappeared chaos, anarchy and mob rule took over.
With this experience in mind we have to know exactly what we are doing when we lay out a path to limited government. The article mentioned earlier, ”The Bankruptcy of Governments”, has a promising title but unfortunately turns out to be yet another example of flawed Austrian thinking. It is an important example to discuss, though, precisely because it so well illustrates the fine line between good and bad analysis.
The author, Alasdair Macleod with the British think tank The Cobden Centre, starts off well:
For a long time governments have been redistributing peoples’ income and wealth in the name of fairness. They provide for the unemployed, the sick, and the elderly. The state provides. You can depend on the state. The result is nearly everyone in all advanced countries now depends on the state. Unfortunately citizens are running out of accessible wealth. Having run out of our money, Governments are now themselves insolvent. They started printing money in a misguided attempt to manage our affairs for us and now have to print it just to survive.
That is not entirely true. The excessive money printing did not start until the Great Recession broke out in 2009. Up until that point EU governments in particular were very good at maxing out taxes on their citizens. But Mr. Macleod’s point about governments printing money just to survive financially is a good one, and falls well in line with my analysis.
However, this statement…
The final and inevitable outcome will be all major paper currencies will become worthless.
…is a bit on the excessive side, to say the least. Austrians have been crying about American monetary inflation for years, yet it has not happened. The reason is that their analysis does not recognize the existence of transmission mechanisms between the monetary and the real sectors of the economy. In order for newly printed money to drive up prices in the real sector there has to be some movement of activity in the real sector to motivate price setters to mark up their prices at hyper-inflation rates. In a recession like the current one those transmission mechanisms are weak – consumer credit demand is weak and it is tough for small businesses to get bank loans for investments. As a result, the newly printed money stays in the monetary sector of the economy, where it has no contact with prices.
This does not mean that a modern economy in a recession cannot succumb to high inflation pressure. We know numerous examples from Latin America where government has used its own spending to push newly printed money out in the economy. This is in part how Venezuela under Hugo Chavez got stuck with 30 percent inflation. So far this has not happened in the United States, but that is no guarantee it won’t happen. While the simplistic Austrian prediction is wrong, the facts on the ground are not sufficient to completely dismiss their argument. More evidence is needed, especially on the nature of the transmission mechanisms.
Alasdair Macleod disagrees. True to the Austrian school he dismisses the use of empirical evidence and quantitative reasoning in economics:
Modern economists retreat into two comfort zones: empirical evidence and mathematics. They claim that because something has happened before, it will happen again. The weakness in this approach is to substitute precedence for the vagaries of human nature. We can never be sure of cause and effect. Human action is after all subjective and therefore inherently unpredictable.
Does this mean that Macleod never drives? After all, he apparently cannot be sure that his fellow Brits will drive on the left side of the street tomorrow just as they did today.
Macleod’s statement about the “inherently unpredictable” nature of human action is of course rather silly. It is, however, typical for the Austrian school. One of its key tenets is the denial of empirical analysis, which of course begs the question why they even bother with economics. But by taking the attitude that human action is inherently unpredictable they also suggest that we as humans are not rational. Rationality means, among other things, repeating successful behavior in order to assure your own survival. In terms of economics this means repeating successful trade and other exchange relations with other rational individuals.
I should not have to explain this to someone who is in the game to change public policy. But Alasdair Macleod appears to be one of those activists/analysts who have been seduced by the supposedly refined nature of Austrian theory without seeing its public-policy consequences. If he did he would realize that a theory that starts out with suggesting that human action is inherently unpredictable will have a hard time convincing legislators that they can trust people to make the right decisions on their own. Quite the contrary, in fact: if we all behave unpredictably there is no chance for a society with a minimal government to survive, let alone thrive; the only way to create a stable, predictable society would be to have government organize and regulate it.
Macleod is of course wrong on the fundamental nature of human action. So is the Austrian theory. May I recommend some reading on the role of uncertainty in economic analysis. Austrian theorists might also want to disseminate Armen Alchian’s classic but very dense essay on uncertainty, evolution and economic theory.
Because of their disdain for empirical evidence and quantitative reasoning, Austrians have a hard time constructing workable analytical arguments on their own. Instead they often spend their time producing pure rhetoric, often directed at competing theories. Mcleod is no exception, going after the man Austrian theorists dislike almost as much as Karl Marx:
Keynes was strongly socialistic. In the concluding remarks to his General Theory, Keynes looks forward to the euthanasia of the rentier (or saver) and that the State will eventually supply the resources for capital investment.
This statement is not only false, but also very telling of the difference between Austrian theory and Keynesianism. Austrians prefer the armchair as the foundation of their analysis, while Keynesians work inductively to constantly evolve and enhance the proficiency of their theory and their ability to interact with the public policy arena. The statements by Keynes that Macleod has cherry-picked are from chapter 24 of the General Theory, where Keynes has left his theoretical work and is speculating about what role economic policy could play, and how government would fit in to that role.
It is important to note that in the preceding 23 chapters of his General Theory Keynes barely even touches upon government, even as a subject of conversation. Already for this reason, Macleod’s statement about Keynes being a socialist is false. But there is also a deeper and from a policy viewpoint more important reason. When Keynes got to the end of his book he had examined the “mechanics” of a modern industrialized economy – he had in effect laid the groundwork for what we now know as macroeconomics. With this pioneer work Keynes challenged a great many prejudices held by Classical economists, but he also opened for the potential of an entirely new era of economic policy.
First and foremost, Keynes’s work allowed for a new understanding of what brings about recessions – and, even more importantly, depressions. Never before had anyone systematically proven that when you try to starve an economy out of a recession, you make matters worse. But to produce and explain this proof, Keynes had to spend almost the entire volume we know as his General Theory; as he was finishing it, he only had time for brief, speculative thoughts about what role government could play in defending or restoring full employment.
This is what Austrians do not get. Keynes’s analysis was systematic. He built a macroeconomic theory, induced from evidence, that allowed him and anyone else who takes it seriously to do an open-ended analysis of what role government might play. Unlike closed systems like Marxism or Austrian theory, the Keynesian analysis is open in that its conclusions are not deductively produced – or, to be blunt, dictated – by the theory.
Herein lies the problem with Austrian theory. Because it refuses to recognize the role of evidence, it refuses to open itself to the probable – as opposed to uncertain – nature of human action. Because there is no room for probability, there is no open end to the analysis an Austrian produces. His conclusions are dictated beforehand.
This leads to major problems when theory is brought in to the public policy arena. More on that in a moment. First, let me wrap up Macleod’s point about Keynes being a “socialist”. In chapter 24 of the General Theory Keynes suggests a death tax as one possible policy measure to help build economic policy in favor of full employment. The tax would be used to fund investment activity when private-sector activity is unable to reach full employment. Keynes speculates on the possibility of having government be a permanent agent in this way, which he suggests would mean that the economy would be operating at or very close to the point of full employment.
Keynes’s theory of investment equates full employment to a point where the so called marginal efficiency of capital is virtually zero. The practical meaning of this is that there is no more profit opportunity left in expanding the economy’s capital stock – it is operating at its economically viable maximum. This is accomplished, Keynes suggests (but does not firmly conclude), when private-sector investment is supplemented by government investment, funded by a death tax
Obviously, a death tax, even at 100 percent, would never lead to government replacing private investment funding. Yet Macleod makes the critical mistake of thinking that the point where the marginal efficiency of capital is zero is also the point where private credit is eliminated. He misreads Keynes’s idea about “euthanising the rentier” as the elimination of privately funded investment. In reality, this statement means that funding for investment is so abundantly available that it ceases to be scarce. Thereby no one can make money on credit in response to systemic uncertainty. Individual risk factors still remain, though, as Keynes makes clear in his elaboration of his theory of investment and the concept of the marginal efficiency of capital.
In short: government eliminates systemic uncertainty while the private sector handles uncertainty and risk at the market level.
I disagree with Keynes’s speculation about the death tax. But I do agree with him that the free market is unable to incorporate and manage systemic uncertainty. How that is best done is a matter for further scholarly work; my own doctoral dissertation was devoted entirely to finding the demarcation line between the roles of government and the private sector in managing uncertainty. What I learned from Keynes is that there is indeed a role for government to play there; the exact nature of that role is still an open question, especially because the attempts made thus far at organizing government to eliminate systemic uncertainty have had a lot of side effects.
I apologize for the wordiness of this article, but it is important to understand the depth of the problem with Austrian theory. One good way to do that is to contrast it toward its arch enemy, Keynesianism.
Speaking of which, it is almost amusing to witness the obsession that many Austrian theorists have with Keynes. As Alasdair Macleod demonstrates, this obsession sometimes gets so bad that they throw out the only analytical tool they themselves cherish, namely logic, just to get another chance to go after Keynes:
The misconceptions of Keynesianism are so many that the great Austrian economist von Mises said that the only true statement to come out of the neo-British Cambridge school was “in the long run we are all dead”.
Let’s put this in its proper Austrian context. In December last year one of the Cobden Centre’s academic advisors, Phillip Bagus, applauded the shrinking GDP that some European countries were experiencing. Bagus was jumping up and down with joy over the fact that Greece had lost a quarter of its GDP and suggested merrily that this elimination of economic activity would free up resources that would create new investments and new jobs. He suggested that it was a home run for the economy that people were laid off from jobs right and left and forced to scavenge for food because an austere government was not providing the poverty relief people had been promised.
Bagus is a prime example of what Austrians do when they enter the public policy arena. They are completely locked in to their theory, without a single open window to the outside world and its empirical evidence that when they are confronted with the worst economic crisis since the Great Depression they suggest that the world needs more of the same. To them there is no such thing as hesitation and caution among private entrepreneurs and consumers. Their static and rigid theory says that consumers and entrepreneurs fail to produce full employment for the economy because government takes away resources from them. There is a great deal of truth in this part, but what the Austrians forget is that there is a second leg to this analysis: they conclude that all you need to do is fire government bureaucrats and they will all get jobs in the private sector. All you need to do is shut down a government agency and someone else will take over their office.
The problem is, as we witnessed in Russia during the 1990s, the private sector may hesitate to step in and absorb idle resources formerly employed by government. The one tiny detail that Austrians forget is that an entrepreneur will not make an investment unless he has reasons to believe that he will be able to pay off the loan he funded the investment with. Furthermore, the banks won’t lend him money toward the investment unless he can make a good case for the profitability of that investment.
Keynes knew of this problem very well. That is why he speculated that government should supplement private investment in times of uncertainty, in order to eliminate systemic risk factors. While I disagree with Keynes’s particular suggestion, I am wholeheartedly with him on the nature of the problem. Individuals can be held back by uncertainty and thereby, in the aggregate, hold back the entire economy.
Austrians do not believe in uncertainty. They recognize its existence but they do not incorporate it into their analysis. Instead, they assume that all that needs to happen for the economy to be perpetually in full employment is that the so called “natural” rate of interest can prevail. They assume the existence of this “natural” interest rate without ever providing proof of its existence. This assumption, again entirely theoretical, allows them to create a perfect intertemporal allocation of resources – in other words, to eliminate uncertainty.
When you ask an Austrian theorist when this natural interest rate will come about, he will give you an answer that resembles something like “in the long run”. In other words, in the long run the economy will always be in a perfect state of equilibrium and full employment.
Keynes always criticized Classical economists for relying on the long run to fix all sorts of problems. When Austrian theorists take the same view on the long run as Keynes did, they jeopardize the very foundation – flawed as it is – of their own theory. Either they have to resort to illogical reasoning or they have to make up their mind: do they agree or disagree with Keynes on the role of uncertainty in the economy?
Alasdair Macleod, needless to say, does not see this lack of logic in Austrian theory. He marches on like nothing happened. The rest of his analysis is unfortunately as simplistic as the Austrian theory he relies on. He echoes a commonly held belief among Austrians that there have never been economic crises before big government:
The misallocation of economic resources which is the result of decades of increasing government intervention cannot go on indefinitely. Businesses have stopped investing, which is why big business’s cash reserves are so high. Money is no longer being invested in production; it is going into asset bubbles. Dot-coms, residential property, and now on the back of zero interest rates government bonds and equities. These booms have hidden the underlying malaise.
Although I disagree with John Kenneth Galbraith on virtually everything under the sun, I have to give Galbraith credit for his book A Short History of Financial Euphoria. There, Galbraith takes the reader on a journey through speculative bubbles that have occurred throughout history – the ones we know of – and done so at times when there was no big government.
I have discussed the nature of today’s crisis at length in other articles. Very briefly, I do agree with Macleod that government has played a bad role in exacerbating this crisis – my conclusion is that our banking system would have absorbed the shock from the real estate crisis were it not for the fact that those same banks had also invested heavily in government bonds. During 2011 and 2012 more and more of those bonds turned into bad assets, effectively destroying an otherwise sound balance on banks’ balance sheets.
The implication of a sound analysis of today’s crisis is that we need to get government out of the economy, but that we need to do it in a structurally sound way and by showing great respect for two groups of citizens:
- Those who already live on the dole because they have lost their jobs and been let down by government;
- Those who still work but have become dependent on government to make ends meet.
The true challenge for freedom-minded public policy scholars is to design a path for our economy out of the welfare state without causing undue hardship for either of these two groups. It can be done. The problem is that we are not getting much help from Austrian theorists here: all they suggest is the destruction of the welfare state so that Phoenix may rise from the ruins.
Macleod is no exception. He makes a good observation about the role of government…
Take France. Government is 57% of GDP. The population is 66m, of which the employed working population is about 25m, 17m in the productive private sector. The taxes collected on 17m pay for the welfare of 66m. The taxes on 17m pay all government’s finances. The private sector is simply over-burdened and is being strangled.
But then, instead of helping pull the economy out of this entitlement quagmire, Macleod resorts to the favorite Austrian pastime, namely to bash the printing of money:
The progressive replacement of sound money by fiat currency has destroyed economic calculation, and has destroyed private sector wealth. These policies were deliberate. We have now run out of accessible wealth to transfer from private individuals to governments. That is our true condition. Governments will still seek to save themselves at the continuing expense of their citizens, and in the process destroy what wealth is left.
He never gets to the usual advocacy for a gold standard, but he comes pretty darn close. However, as a brief look at Galbraith’s book will show, we have had crises even during the heydays of the gold standard.
The problem is not big money. The problem is big entitlement. It would be nice if Austrians could put down their Scriptures and help us get rid of the welfare state in a sound, stable way that encourages people to be optimistic about the future. If they are not interested in that, may I suggest they withdraw to their academic chat rooms and stop pretending to be concerned.
Amazingly, despite a century of evidence to its disastrous consequences, socialism still sticks its ugly face out in the public arena from time to time. Before the Berlin Wall fell its demagogues were trying to pick what they thought were the cherries out of the Soviet pie and present them as a palatable, even tasty option to Capitalism. Then the Soviet empire crumbled, and after a decade in the wilderness the socialist ranters came back with a vengeance.
They had found “global warming”.
We who went to school in the ’70s and early ’80s were told by our science teachers that the world was steadfastly heading for a new ice age. Science books came with frightening images of cities, far down in southern Europe, buried in ice and snow. On the horizon, a mile-thick glacier that slowly pushed south.
Some time during the ’80s the preachers of climate change stopped talking about the pending ice age. Perhaps they could not get enough research grants to continue to stay away from teaching at their colleges, so they invented a new climate change story: global warming.
A couple of years ago the climategate scandal put a big, fat nail in the coffin of the global-warming fairy tale. In January of this year news broke that there has been no global warming for 16 years now. By now, even moderately intelligent liberals should start wondering what their climate preachers have been up to, and why they can’t deliver the climate disaster they have promised for so long.
While the world is slowly beginning to see the light with sober eyes, many leftists have invested far too much of their careers in the global-warming fairy tale to let go of it. One of them is a South African socialist by the name of Jay Naidoo. Like so many other socialists of late, he is trying to use “global warming” as a moral carte blanche to impose his collectivist nonsense on his fellow man.
Naidoo is former minister of reconstruction and development in the South African government and currently chairs an organization called Global Alliance for Improved Nutrition. He gets plenty of space on the Euractiv website to rant about everything between “climate change” and poverty, except what really matters:
“The drought is brutal in the north of Kenya around Lake Turkana. The rains seldom come and the lake is drying up. So is the hope of the Turkana, a proud people. They are mainly pastoralists. But the grazing lands are fast disappearing as are the fish in the rapidly receding lake.
Right here, Naidoo has put the blame on the hardship of the Turkana on non-existent global warming. Without offering the slightest evidence to the claims he makes about their environmental situation, he takes it as the starting point of a long rant on poverty and the evil West.
Even more amazingly, in the next paragraph he tells us that the Turkana are the victims of lawlessness and anarchy – yet somehow the poverty of the Turkana is still caused by evil Capitalism:
Heavily armed marauding bands of bandits from the Horn of Africa regularly raid lands and seize the cattle of the Turkana. As one herder said, “They take our wealth and our food. Our cows are our bank. We are alone. There is no government here to protect us. It is the rule of the gun. Our homes are torched, our innocent are murdered. They want to drive us from our land. Our children are not safe. They must go to the city.”
Any common-sense minded person would immediately ask why the Kenyan government, who claims jurisdiction over the territory where the Turkana live, is not interested in enforcing the rule of law. Another question is why property rights are so weak in this part of the world. Could it be because socialists look down their nose at private property?
In the next sentence Naidoo takes all the blame for the poverty of the Turkana away from the thugs who assault them, as well as from the Kenyan government:
Here poverty is driven by climate change, a precursor to the new resource wars to be fought over water, land, food and competition over scarce resources.
Like mankind has never lived under resource scarcity before. Mother of all ignorance…
Any time the price of an item is higher than zero, it is because that resource is scarce. Scarcity, in fact, is one of the driving forces that makes a society evolve – it does not motivate societal evolution on its own, but it is one of the key ingredients. But scarcity is universal and affects all mankind one way or the other. We all have to adjust our lives to the fact that we cannot get everything we want, in an instant, for free.
The question is why some societies evolve under scarcity, while others don’t. The best and most obvious answer to that question is found on the Korean peninsula. South Korea, with a population twice the size of North Korea’s and on a smaller piece of land, is able to feed itself, clothe its population, cure the vast majority of their diseases, educate them and keep them safe. The North on the other hand cannot even feed its own children.
Most people would dismiss the comparison between South and North Korea with something to the effect that “well, everybody knows that Communism isn’t working”. But the point is that despite this knowledge – despite the glaringly obvious, ocean-wide difference between Capitalist South Korea and socialist North Korea – socialism is still given a valid presence in the global public policy debate. For some reason there are people who still believe that you can blend South and North Korea, yet what they find out too late when they try is that the ingredients from “North” that go into the blend are venomous to vital organs of “South”.
The very essence of socialism is the transferal of property rights from the individual to the “collective”, almost always represented by a government. The “collective” is given the right to seize parts or all of what the individual acquires through work, trade and investment. Yet when the “collective” is given this right there is a proportionate loss of rights for the individual, and with the loss of right to the proceeds of his work, trade and investment, the individual also loses the incentive to pursue those proceeds.
This is the first and most important reason why societies with socialist economies are poorer than societies that rely on Capitalism.
As for the Turkana in Naidoo’s story, their reason to evolve and become more prosperous is robbed from them by the thugs who can come and seize their cattle with impunity. The thugs have de facto become their socialist government that imposes a heavy tax on them.
Naidoo, of course, is blind to this fact. On the contrary, he continues to cast the blame for the Turkana’s poverty on everyone else except the thugs who steal their cattle. Euractiv again:
The poverty is chronic, systemic and leaves many in despair, abandoned by the political and economic elites of the world.
Then he globalizes his warped views:
That story is repeated in the many villages I have been to in the India subcontinent, in the slums of Africa and Asia where families live in a space that is barely bigger than the bathroom of middle class families. In these communities people feel that God has forsaken them. While we have undoubtedly made progress, when I see the official reports suggesting “Enormous progress has been made towards achieving the Millennium Development Goals (MDGs). Global poverty continues to decline, more children than ever are attending primary school, child deaths have dropped dramatically; access to safe drinking water has been greatly expanded…” I wonder when these gains will trickle down to the billion people I encounter at the edges of our humanity.
My native country, Sweden, was one of the poorest nations in the northern hemisphere back in the mid-19th century. It went from being an agricultural backwater on the northern edge of Europe to a dynamic economy with rapidly growing prosperity in the 1930s. What happened? Did the world suddenly give Swedes foreign aid? Did the rest of the world suddenly impose a hate-the-rich tax in order to give handouts to Swedish farmers?
No. The reason was the same that allowed industry and entrepreneurship to thrive and prosperity to grow all over Europe: limited government and respect for property rights. (That Sweden later abandoned those principles is another story.) The smaller a government is, the more concentrated it becomes on its only real function in society, namely to protect life, liberty and property. By contrast, the bigger government gets the farther away it will drift from that function. That is why socialist governments – which includes the Kenyan government – lose track of things like people’s right to the proceeds of their own hard work.
Hence the disaster in Turkana.
Back to Euractiv, where Naidoo starts pushing for a global welfare state:
What the bottom half of humanity sees is a new apartheid that divides a global rich and predatory minority from the overwhelming majority’s growing poverty, joblessness and social inequality.
And here we go. A man who purports to be some kind of compassionate caretaker over the poor in the world finally comes out as what he truly is: a socialist hate merchant.
People who live in free countries with democratic governments, who have the right to own the proceeds of their work, who get up in the morning, provide for their loved ones, obey the law and donate to charity – they are characterized as a “predatory minority” by Naidoo. People who live honest, decent, productive lives and do their best to be contributing members of society – they are castigated as “predatory” by Naidoo, simply because they happen to live in a rich, industrialized, free country.
Even worse, Naidoo’s rhetoric is aimed at those who create jobs for hundreds and hundreds of millions of people. Entrepreneurial visionaries like IKEA’s Ingvar Kamprad or Microsoft founder Bill Gates; industrialists like the Toyoda family; around-the-clock working corporate executives who make sure their businesses continue to provide the world with clothes, food, cell phones, medicines, light bulbs, tools, appliances, water purifiers and other essential consumer goods. All these men and women are a “predatory minority” in the eyes of Jay Naidoo.
This is the level that all socialists eventually sink to. Their world view is one of relentless, ongoing conflict. To them, people do not cooperate voluntarily. People do not by their free will take a job with a large corporation – they are forced into that job by the “system”. To socialists like Naidoo there is no other cooperation than that which is enforced by government.
Even more pathetic is the fact that socialists like Naidoo are so totally and utterly blind to the free will of individual human beings. Ask any young engineer who works long, hard hours for the car manufacturer Hyundai in South Korea if he has been forced into that job by an evil Capitalist. Ask him if he would rather live and work in North Korea instead.
When Naidoo resorts to referring to the high-productive people who take advantage of economic freedom as a “predatory minority”, he gives away his true identity. His rhetoric is nothing more than the same old, dingy class warfare rhetoric that socialists have been using for a century and a half by now – and what has that rhetoric given us?
It has given us the Gulag Archipelago; the Berlin Wall; the Killing Fields in Cambodia, Cuban prison camps and children starving to death in the streets of North Korea. And don’t forget the Third Reich brand of socialism, according to which the “predatory minority” should bear a yellow six-point star and be exterminated in death camps.
Wherever socialists have gotten the chance to identify a “predatory minority” they have brought about war, chaos, starvation, depravity and death.
Naidoo’s rhetoric is the same kind of divisive, aggressive, conflict-driving language that has caused so many wars, civil and other, around the world over the past century. Naidoo’s class warfare rhetoric fueled the Leninist revolution which ended up costing 25 million Russians their lives. Naidoo’s class warfare rhetoric falls in the same line as that which Josef Göbbels used to fire up the masses against a small, innocent group of fellow citizens. Naidoo’s class warfare rhetoric built an Iron Curtain across Europe and is still today being used to defend the North Korean tyranny.
It does not help Naidoo’s case that when he gets to the practical side of his rant, he focuses entirely on “equality” and totally ignores the variables that really matter:
We need to go beyond measuring progress as a set of narrow input and output indicators. We need to address the underlying drivers of poverty and that the data has hidden a growing social and economic inequality which has risen dramatically in the world.
Suppose Jack and Joe earn $1 per day on Monday. On Tuesday Joe starts manufacturing gobbletigooks in his basement. He sells them with great success and rapidly increases his daily income. On Wednesday he earns $2 per day, while Jack still earns $1.
Where there was income equality on Monday there is now income inequality. How is Jack worse off under income inequality than he was under income equality?
On Friday, Joe needs to hire help. He now earns $4.50 per day and hires Jack to do the simple manufacturing work at $1.50 per day. The income inequality is now bigger than ever, but comparatively low-earning Jack has increased his income by 50 percent thanks to Joe’s entrepreneurship.
How is Friday’s income inequality worse for him than income equality was on Monday?
Of course, socialist Naidoo does not answer this question. Instead he dismisses China’s enormous strides toward prosperity in the past two decades:
Poverty has been defined as an income of less than $1.25 a day. Because figures are not disaggregated what is ignored is the fact that China accounts for the bulk of this success. Sub-Saharan Africa, on the other hand, is not on track on its poverty reduction
Of course not. That region is still ruled by dictators and war lords, and its largest country, Nigeria, is being torn apart by radical, Medieval islamists whose respect for individual and economic freedom we know from the Taliban era in Afghanistan. Once again, Naidoo proves the point about the correlation between on the one hand the lack of respect for life, liberty and property and on the other hand prosperity and opportunity for all.
In his position as chair of a large lobbying organization, Jay Naidoo has considerable influence on the global public policy arena. His divisive, hate-mongering socialist rhetoric is wrapped in dangerously seductive, superficial compassion for the poor, yet when push comes to shove all he wants is more government, more bureaucracies and more redistribution from the rich to the poor. He totally ignores the economic mechanisms that bring about prosperity. He turns a blind eye to the forces that have successfully lifted more than a billion people out of abject poverty in the past two decades.
Jay Naidoo is the kind of person who would rather see everyone equally poor than everyone wealthy, if that meant some got wealthier than others.
At the end of the day, that is precisely what socialism is all about. It turns people into instruments for an idea, an ideology, reducing them to bricks in a game of political power.
Socialists have had a century to prove that their ideology can work. On every occasion where they have gotten the chance, they have failed. And they have failed on every account imaginable.
Socialism is nothing more than a highway to poverty, tyranny and serfdom – for all.
As the world is now beginning to realize, the Cyprus Bank Heist was not a one-time, exceptional measure to save banks, never to be applied again. On the contrary, as I explained earlier this week the idea of confiscating bank deposits to save banks is catching on internationally.
This is a frightening perspective on the issue, because it means that we, the Western civilization, is about to turn our backs on one of the most important cornerstones of our prosperity: the property rights contract between banks and their clients.
There is no doubt that more governments are going to apply the Cyprus Bank Heist model to their own jurisdictions. You would think that this was bad enough – but it is not. Today we can report that the Cyprus Bank Heist model is soon going to expand into other assets than bank deposits.
More on that in a moment. First, let us note that the Eurotarians who govern the EU are temporarily in damage-control mode. Mario Draghi, the president of the European Central Bank, is trying to blow cute little smoke screens to draw people’s attention away from the devastating consequences of the Cyprus Bank Heist. EU Observer reports:
European Central Bank chief Mario Draghi on Thursday (4 April) admitted that an initial plan to tax small savers in Cyprus was “not smart”, but stressed that the island is “no template” for others.
Really… Every finance minister in the euro zone has endorsed it. Finland, Ireland and Estonia have vowed to use it themselves. The Canadian parliament will soon consider a bill that would legalize confiscation of deposits in “systemically important” banks. New Zealand is allegedly considering a similar law. Et cetera.
No, the Cyprus Bank Heist was “no template” at all. Not at all.
Back to the EU Observer works hard to draw people’s attention to small details instead of the big, freedom-shattering principled questions that the Cyprus Bank Heist give rise to:
Draghi said that the ECB had not been the source of the original (and subsequently rejected) idea to impose a tax on small savers, but did agree to it as part of an overall deal on 15 March. “That was not smart, to say the least, and it was quickly corrected the day after in the Eurogroup conference call,” Draghi said during a press conference in Frankfurt after the monthly meeting of the ECB governing council.
Draghi’s strategy is to get people bogged down in some kind of nonsensical debate over who should lose the most. Once people talk about technical details they have de facto accepted the architecture itself.
Draghi’s support for the Cyprus Bank Heist as a template for the future is revealed later in the EU Observer article:
“A bail-in by itself is not a problem, it’s the lack of rules known to all parties which can make a bail-in a disorderly event, and the lack of capital buffers. Absence of rules give this impression of ad-hoc-ary in these cases,” Draghi said. The quicker eurozone-wide rules are in place on how to deal with failing banks and who picks up the bill, the better, he indicated. “We would like these rules not in 2018-2019 as it’s foreseen, but way, way earlier – in 2015.” “It is very urgent that we have in place a European framework for resolution, restructuring and recapitalisation of the banking systems. These are the lessons I would draw from the Cyprus event,” he said.
So first you create an “event” – a government seizes private bank deposits – then you say that the lesson from the event is that we must do it again.
Why do I come to think about the staged Polish invasion of Nazi Germany just prior to September 1, 1939? Hmm…
But regardless of what hot air Mario Draghi is producing, others have already grabbed the torch and carried it to new places where they can set private property rights on fire. First off is the CEO of Unicredit, a large, international bank. From Goldcore.com:
The CEO of Unicredit Federico Ghizzoni said yesterday that it is “acceptable to confiscate savings to save banks.” He said that the savings which are not guaranteed by any protection or insurance could be used in the future to contribute to the rescue of banks who fail and that uninsured deposits could be used in future bank failures provided global policy makers agree on a common approach. He called for “a common solution in Europe” saying that the “EU should pass laws identical and shared in different member states”. Indeed he went a step further and called for a global coordination of deposit confiscations to rescue failing banks.
So what do you think will happen when all depositors have depositors’ insurance? Exactly! There will be a new clause added to some existing law that voids that insurance under “exceptional circumstances” such as when the government needs to seize your assets to save a bank – or a government with unsustainable deficits.
If we add Mr Ghizzoni’s words to the Canadian bill to make it legal for banks to “turn liabilities into assets”, and hold them up against the background of the European chorus of praise for the bank heist model, we get a clear, chilling and very dangerous picture of how this destruction of private property rights is going to spread to every corner of the world.
And once it has conquered all free nations, it will start spreading to other assets as well. Also from Goldcore.com:
An interesting development in the precious metals market is the largest Dutch bank, ABN Amro, has said that they will no longer be providing physical delivery of precious metals including gold, silver, platinum, and palladium bullion coins and bars. ABN AMRO, one of the largest banks in Europe announced in a letter to clients that it would no longer allow clients to take delivery of their metal and instead will pay account holders in a paper currency equivalent to the current spot value of the precious metal. Thus, instead of legally owning a risk free, physical asset (a bullion bar or a bullion coin), the bank’s clients are now unsecured creditors and are now exposed to the bank and the financial system – somewhat defeating the purpose of owning precious metals. The move highlights the importance of owning physical bullion either in your possession (be that be in a safe or vault in a house, in the attic, under the floorboards or elsewhere in your possession) or in a secure vault in a country that is stable and respects property rights.
Indeed it does. But it also highlights a new turn in how the global banking system is trying to prevent people from escaping the next Cyprus Bank Heist.
If you don’t want to keep your money in a regular bank account, but instead own something that we cannot physically take from you – then we are going to make sure we can physically take it from you anyway.
It is shocking to watch the spreading of the bank heist model. It is even more shocking when you realize that this is actually an assault on the oldest, currently existing form of private property right. The entire, modern banking system stands and falls with the banks honoring this property right. This very same banking system has done an enormous amount of good for all countries who have embraced the pillars of Western Civilization – among them economic freedom – and helped create prosperity and wealth of proportions previously unknown to man. Private banking, honoring property rights, has been instrumental in allowing desperately poor nations to lift themselves to a Western-style standard of living.
And now – what is this going to lead to? What will come of this, when the accumulation of wealth has been reduced to a form of fodder for banks and governments?
Are we watching the beginning of the end of free-market capitalism as we know it?
So far, no Cyprus Bank Heist legislation has been introduced here in the United States. Let us pray that it won’t happen. But if that happens, or if it becomes de facto law through some kind of international treaty, then… well, where do we stand then?
Last week I published the first of two articles on income distribution. This topic is important for many reasons, one being that the redistribution of income and wealth is the main reason for the welfare state to exist. The welfare state, in turn, is a social and economic system that is entirely contradictory to the concepts of individual and economic freedom. It is a dysfunctional hybrid between the ideologically pure communist central-planning model and free-market capitalism. The socialist ideologues who created the Scandinavian welfare state, such as Ernst Wigforss, Alva Myrdal and Rudolf Meidner, thought that they could get the most of the benefits from socialism while still allowing free-market capitalism to create enough prosperity for all.
This was of course a huge miscalculation. Economists of many walks of life – or economics – pointed to this early on. The foremost early critic of the welfare state was Friedrich Hayek, whose book Road to Serfdom is really a big warning signal to friends of economic and individual freedom of the venomous nature of the welfare state. Others followed, such as Milton Friedman, but their work was for the most part academic, leaving the public policy field open to statist scholars to advance the welfare-state agenda.
America’s most prominent advocate of the welfare state was John Kenneth Galbraith. He wrote several public-policy oriented books back in the late ’60s and the early ’70s, among which The New Industrial State is a panegyric marketing effort for the Scandinavian model. Not only did Galbraith fervently propose a socialized health-care system, but he also wanted far-reaching structural measures in the economy for income redistribution.
The reason why income redistribution has become a cornerstone in welfare-state promoting policies is that the welfare state, unlike communism, does not distribute consumer goods and services among the citizenry. The goal with socialism – a goal shared by both communists and welfare statists (or social democrats as they prefer to call themselves) – is to eradicate differences between individuals in terms of what they have. This is why, e.g., the Cuban and North Korean governments hand out food rations to people. While the purpose of food rationing nowadays is to divide up whatever bread crumbs the communists are able to produce, the original purpose was indeed to make sure everyone was equal.
This is also why communist governments assign housing, furniture, bicycles and cars to people. In the last decade of East European communism this ridiculous distribution system was unraveling; in Budapest in the ’80s you could find shopping malls reminiscent of those in the West, filled with small shops that sold everything from shoes to appliances. The products were clearly of lesser quality than what we had in the West at that time, but there was no doubt that the communist regimes had begun realizing that the free market was simply much better at satisfying people’s needs.
Instead, the communists looked at transitioning from their rigid, dictatorial system into a more Scandinavian-oriented welfare state. This included income redistribution, but since there were not a whole lot of people with high incomes to take from, and a lot of poor people to give to, they failed to make the leap.
That is fortunate, because by the time Eastern Europe got out of its communist system the Scandinavian welfare state was beginning to show very clear signs of economic arthritis. The Swedish economy was no longer growing at the levels it had back in the ’50s and ’60s. Its inflation-adjusted GDP growth fell below two percent per year. Denmark was having even worse problems and plunged into a full-fledged fiscal crisis. Finland was hit by a double whammy: the true costs of its welfare state combined with enormous losses in exports as the Soviet Union collapsed.
In the cases of Sweden and Denmark there was no doubt that the slow growth was directly related to exceptionally high taxes. These taxes, in turn, were used to finance very elaborate income redistribution systems. With slower growth the higher incomes grew less than what the welfare state needed, while more people remained in income brackets where they were eligible to receive redistributive entitlements.
- to pay for the welfare state, government needs to raise taxes;
- as taxes go up the private sector finds way to cope and still produce jobs that pay reasonably well;
- there is still a large tax base available for government to tap into in order to finance all the entitlements it has handed out;
- as taxes increase, though, the private sector reaches a point where it can no longer adapt, but instead goes into a state of stagnation;
- when the private sector stagnates, so does the tax base – and the welfare state is hurled into a state of fiscal crisis.
In other words, political efforts at redistributing income between citizens eventually open up the fiscal whirlpool that has swallowed Greece, Spain and Portugal and is now sucking down Italy and potentially even France.
There are philosophical reasons why income redistribution is wrong. I will leave them for a future article. For now, let us conclude that from an economic viewpoint, income redistribution does not work. It harms the entire economy, erodes prosperity and creates perennial deficit problems.
Bottom line: you cannot combine free-market capitalism with any form of socialism. Either you embrace capitalism and freedom, or you learn to live with the atrocities of socialism.
It’s really that simple.
The second issue of Quo Vadis Essay Magazine is now available. Enjoy its discussion of the concept of laissez-faire and where it fits in to the endeavor we know as Western Civilization.
One of the perennial, unanswered questions in this world is: when is government big enough for a leftist? All we hear from people of left-leaning political convictions is that government must grow bigger. American liberals continuously call for new entitlements – the latest being the ridiculous universal child care program funded by money borrowed from China – but even in notoriously welfare-statist Scandinavia the left continues to demand more government. In Sweden, e.g., the incumbent prime minister and his cabinet (nominally “center-right”) are forcing local governments to raise taxes to record levels. The social democrats, in turn, want to significantly expand government spending and raise payroll taxes. And this in the country that has been notorious for world-record high taxes for almost half a century now.
Add to this the trend of higher taxes sweeping across the EU, and there should be no doubt that the left harbors a totally insatiable desire for more government, regardless of how big government already is.
You would think that the debacle of socialism toward the end of the 20th century had left big enough footprints in the history books for anyone to see and be deterred. Not so. Socialism is still alive and kicking and has even seen a resurrection over the past decade. The international socialist movement, which fell into disarray and a deep identity crisis after the fall of the Berlin Wall, got its act together again in 2001 when muslim terrorists committed the atrocities of 9/11 here in America. Suddenly, the old, deeply rooted anti-Americanism that had driven the global left during the Cold War was jolted back to life.
The resurrection of the global left accelerated in 2003 when they aligned themselves with Saddam Hussein to defend his tyranny against a multinational coalition. From there, the global left reignited its hatred for economic freedom and capitalism, a hatred that was partly inspired by the seemingly successful implementation of socialism in Venezuela. Socialists all over the world merrily turned a blind eye to facts such as out-of-control inflation at 30-35 percent per year, the virtual destruction of property rights when the military seized everything from farms to oil production facilities, the complete pull-out of foreign investors, food shortage, power shortage (in a country that exports oil) and rampant crime.
To the global left, the very existence of Venezuela gave them hope – hope that their warped view of the world was still somehow valid.
Sadly, the political virus of socialism is not contained to Venezuela. In Ecuador, president Correa has been copying “bolivarian” socialism since he took office in 2009. Reinvigorated by another election victory, Correa now sets out to make his destruction of the country “irreversible”. From the Buenos Aires Herald:
Ecuadorean President Rafael Correa said his party likely won three-quarters of the seats in Congress in last weekend’s election and vowed today to “steamroll” through reforms that will make his socialist model irreversible. The 49-year-old economist was re-elected on Sunday with 57 percent of votes, some 34 percentage points more than the runner-up. During his six years in office he has won broad support with high spending on infrastructure and social welfare.
There is another side to his “success” story. We will get to it in a moment. For now, let’s listen to what the Buenos Aires Herald has to say:
“This is going to be a legislative steamroller to serve the interests of the Ecuadorean people. … In democracy, the winners rule, but the losers have to be respected,” he told foreign reporters at the presidential palace.
The left always reduces democracy to a matter of election results. Or, as it has more aptly been called: the tyranny of the majority. In the socialist paradigm, majority votes are unabridged mandates, which explains why the left so adamantly uses its election victories to “transform” the countries they rule. Look at what Franklin D Roosevelt and his Democrat cohort in Congress did to America during the 1930s; go back and see what happened to France after Francois Mitterand was elected president in 1981 – or just glance at the arrogance of the current French president and his socialist majority in the National Assembly.
And these are mild examples by historic comparison.
The Herald again, where the Ecuadorean president takes his hubris to the next level:
“We’re overwhelmed with the amount of support from people. … We’re going to deepen the citizen’s revolution, build a new homeland and make it irreversible.” … [Correa] also promised to press ahead with socialist reforms to empower the low-income majority and dismantle what he called an elitist system that controlled the state and neglected the poor.
Alright, let’s stop there for a second and take a look at the other side of the story. Here is what the Heritage Foundation has to say about Ecuador in its annual report Index of Economic Freedom:
Ecuador’s economic freedom score is 46.9, making its economy the 159th freest in the 2013 Index. Its overall score is 1.4 points lower than last year, with substantial declines in the control of government spending and investment freedom offsetting improvements in labor freedom and freedom from corruption. Ecuador is ranked 26th out of 29 countries in the South and Central America/Caribbean region, and its overall score is far below world and regional averages. Once considered moderately free, Ecuador has slid significantly in the rankings and continues for a fourth year as a “repressed” economy. The reach of government continues to expand to economic sectors beyond the petroleum industry, and pervasive corruption continues to weaken property rights. The private sector has been marginalized by a restrictive entrepreneurial environment. Ecuador’s underdeveloped financial sector, often subjected to state-directed allocation of credit, limits access to financing and adds costs for entrepreneurs. The overall investment climate has become increasingly risky because of the repressive political environment. The restrictive trade regime is reducing competition and eroding productivity. By controlling flows of trade and investment, the government has been forcing closer economic and commercial ties with Venezuela and China.
As Bloomberg.com reports, this unrelenting decline in economic freedom is taking its toll:
Ecuador’s economy, South America’s seventh biggest, is growing at its weakest pace since 2010 as lower oil prices and limited financing options after a 2008 default crimped government spending and cooled domestic demand. Gross domestic product expanded 4.7 percent in the third quarter from the previous year and 1.5 percent from the prior quarter, the central bank said today in a report on its website. The bank revised down figures for second-quarter growth to 4.6 percent from a previously reported 5.2 percent, the lowest yearly reading since the third quarter of 2010.
These growth figures may seem strong, but they are driven entirely by a government that is not only growing its spending, but doing it while critically dependent on oil-export revenues:
Ecuador’s government, which depends on oil sales for about 44 percent of its revenue, used public spending to boost growth in 2012, Economic Policy Minister Jeannette Sanchez said yesterday. As oil prices fell last year, revenues declined, which limits the amount the government can spend to stimulate the economy, said Capital Markets economist Michael Henderson. “Under Correa you’ve basically seen government spending driving growth,” Henderson, who forecasts 4 percent annual growth in 2012 and 2.5 percent in 2013, said Jan. 2 in a telephone interview from London. “You’re going to see domestic demand slow further and pretty much we expect that to translate into a halving of growth rates from 2012 to 2013.”
It would be a valid point that this expansion of government spending should pull the economy into a higher growth gear. However, for that to happen, the economy must meet three conditions: it must have a healthy entrepreneurial environment; it must have a well-working credit market and a free banking system; and the spending that government engages in must be of such a kind that it actually generates productive economic activity.
The first condition is essentially the same as rock-solid protection of property rights. If a country’s property rights system is weak, no one will risk his investments even if he sees the potential to make some money. As the Heritage Foundation said, Ecuador has not exactly excelled in its protection of property rights.
The second condition is also not met by the Ecuadorian economy. The Correa government has been very heavy-handed in regulating the banking sector, which has stifled access to credit and made it more difficult to finance expansion of private businesses. As a result, it is difficult if not impossible for the private sector to take advantage of any sign of growing economic activity, including government spending on, e.g., infrastructure.
The third condition is rarely discussed in the literature on the role of government spending. If government pours more money into entitlement programs, then there will be no substantial multiplier effect at all for the private sector to capitalize on. Entitlements, especially in the form of work-free income, discourage productive activity such as participation in the work force. At the same time, there is no discernible increase in consumer spending, as the recipients of those entitlements are at the very bottom of the income scale.
A good part of the Correa government’s spending has been on entitlements – though it is still somewhat difficult to determine the exact figures – which leads to the conclusion that a government-driven expansion of the economy falls flat to the ground beyond the dollars the government spends.
The Bloomberg report also indicates that there is a looming budget deficit crisis in Ecuador, which means that Correa will soon face the same problems that Hugo Chavez had to deal with in Venezuela. Chavez chose to print money (partly through so called sterilization of the exchange rate) which ultimately set off an inflationare bonfire in the Venezuelan economy. Will Correa follow in his footsteps? To do so he would have to introduce a national currency; so far he has conveniently been riding on the coat tails of the U.S. dollar.
Would he be willing to drop the dollar as the nation’s currency? Let’s return to the Buenos Aires Herald to see if they can give us a clue:
Among the bills Correa has pledged to push are a plan to distribute idle land among the poor, and a media law to regulate content in newspapers and TV networks – which could stoke an ongoing confrontation with opposition media. “We’ll ask for the same things that we asked for before this resounding victory: for the media to be decent, ethical, to inform instead of manipulate, to communicate instead of getting involved in politics,” the president said. In the past, Correa has called journalists “dogs” and “hired assassins,” and has filed lawsuits against reporters and media owners who he says are determined to undermine his government. He is also expected to pass a new mining law to ease investment terms that could pave the way for the development of some large and mid-sized projects that would let Ecuador diversify its economy away from a dependence on oil exports.
So the freedom of press is in grave danger, and Correa presses on with more government spending despite a decline in oil revenues. So far the Chinese have been generous with loans to cover his budget deficit, but unless Correa is going to put all his country’s oil reserves in Chinese hands he will sooner or later come to the point where Beijing imposes a credit ceiling on him. At that point, he will either have to abandon his socialist agenda – or introduce a national currency.
Once the national currency is there, he can basically create whatever commando economy he wants. That would only accelerate his nation’s plunge into the despair and deprivation that always follows in the footsteps of arrogant socialist revolutionaries.
If the Ecuadorian people cannot be saved from the inevitable, at least let’s hope that Correa’s failure will stand as a stark reminder to the world – just like Venezuela does today – that socialism is never, ever a free meal.
In a time when it is becoming glaringly obvious that the European welfare state is on critical life support, there seems to be a bit of an existential debate emerging in the West. Europe has been so invested in the welfare state over the past 75 years that no one alive can remember what life was like without it. In America, the liberal elite envies Europeans who have the privilege of paying a lot more in taxes without getting anything more back. As the welfare state crisis unfolds, the political and self-appointed intellectual leaders of the West are forced to re-examine the very premises of their own existence in the public arena.
So far, this has not led to any major mea-culpa confessions of economic and social mistakes. The European Union, led by an unelected class of Eurocrats, has almost wiped Greece of the macroeconomic map in order to protect the welfare state (and the common currency). They have practically stamped Spain into a wet spot between fiscal annihilation and political humiliation. Italy, Portugal, even larger countries like France, are waiting for their turn.
On the American side of the Atlantic, Canada has thus far preserved its welfare state by shaving off “inefficiencies” and leveling out its taxes. But their high dependency on welfare has created plenty of drug and crime problems, and they still cannot afford to give their citizens decent health care under their socialized system. Canadians with money still come in droves to the United States to get treatment – and then they go home and vote for politicians who want to keep that socialized system alive.
There is a fair amount of debate over the welfare state in Canada. It remains to be seen if the country that has always tried to strike a “prudent” balance between Europe and the United States can come to grips with what foot they want to stand on.
In the United States, the battle between the European welfare-state ideology and liberty rages on. The former camp is represented by president Obama and his entourage of arrogant statists; the latter has the support of the majority of the American people. In 2012 the president and his leftist cohorts lost two big states, North Carolina and Indiana, and almost ten million voters who had previously backed Obama decided to stay home. What kept Romney from winning was a similar decision by three million Conservative and Libertarian voters, some of whom chose to vote for Gary Johnson out of principle.
In that same election, friends of freedom reinforced their positions in state legislatures and gubernatorial mansions. The Tea Party movement is now producing a new generation of electable candidates.
The resiliency of the Tea Party movement despite resistance even from Republican leaders is a strong indication that support for the European welfare-state ideology may have reached its peak in American politics. It will take time for liberty to regain the upper hand, and the outcome of that battle is far from certain. But there is also a new sense of determination emerging among Republicans in Congress, and rising support for traditional Conservatism across America. A recent study by Gallup reveals a notable slant in the Conservative direction among Americans in general: the most conservative states are more conservative than the most liberal states are liberal. This means, in short, that liberalism is diluted even where on its own home territory.
It is also encouraging to see the strong popularity of Republican governors such as John Kasich in Ohio, Scott Walker in Wisconsin and Chris Christie in New Jersey. They are all more or less fiscally conservative and represent a defense line against the invasion of the European welfare state. (And don’t forget the Republican takeover of Michigan, quite an accomplishment.)
There are, in other words, many reasons to be optimistic about the future of America. Once the European welfare-state ideology has been driven off our shores we can focus on rebuilding an economy based on free enterprise and a society based on faith, charity, individual responsibility and self determination.
Before we get there, though, we have to keep up the fight in every corner of the public policy arena. Many disillusioned supporters of the welfare state are still scrambling to market their warped vision of a benevolent government as palatable, even desirable, for America. The latest example comes out of The Economist, in the form of a panegyric Festschrift to the Nordic welfare state:
Smallish countries are often in the vanguard when it comes to reforming government. In the 1980s Britain was out in the lead, thanks to Thatcherism and privatisation. Tiny Singapore has long been a role model for many reformers. Now the Nordic countries are likely to assume a similar role.
They forgot to mention Switzerland and Luxembourg, both of whom have kept their welfare states to an absolute minimum by European standards.
That is partly because the four main Nordics—Sweden, Denmark, Norway and Finland—are doing rather well.
A stretch of facts to the point of breaking. Sweden has one of the highest rates of youth unemployment in Europe. The Norwegian economy is as big as the Swedish, with half the population. Sweden has a violent crime rate per capita that is higher than its three neighbors – combined.
Denmark has a personal income tax rate that begins above 40 percent. Finland’s employment numbers are trending negatively, as its economy has become frightfully dependent on exports; the flip side of spending all your political capital on boosting exports is that you have to suppress domestic demand. When exports go bust, there is no domestic spending to make up for it.
More on these mechanisms in a moment. For now, back to The Economist.
If you had to be reborn anywhere in the world as a person with average talents and income, you would want to be a Viking. The Nordics cluster at the top of league tables of everything from economic competitiveness to social health to happiness. They have avoided both southern Europe’s economic sclerosis and America’s extreme inequality.
Of course. Denmark went through a devastating period of austerity in the 1980s, while Sweden was hurled into its own depression in 1991. In 18 months, unemployment went from two percent to 15 percent. Government cut spending and raised taxes in an austerity package equivalent to nine percent of GDP.
Denmark fell back into austerity in the early 2000s. They closed a number of hospitals under the single-payer system, forcing Danes to accept health care rationing as part of their daily lives. In Sweden, austerity continued and the single-payer health care system laid off one fifth of its medical staff in a matter of a few years.
The Swedish disaster has continued. Today, the employment level among working-age Swedes is eight percentage points lower than it was before the crisis in the early ’90s. This is reflected in massive youth unemployment, and a widespread system of temporary jobs for those who can get a foot in the door of the labor market.
The Economist again.
To politicians around the world—especially in the debt-ridden West—they [the Nordic countries] offer a blueprint of how to reform the public sector, making the state far more efficient and responsive. The idea of lean Nordic government will come as a shock both to French leftists who dream of socialist Scandinavia and to American conservatives who fear that Barack Obama is bent on “Swedenisation”.
What lean government? This classic research paper by three economists at the European Central Bank shows that the Nordic welfare states are far less efficient than the American. Output efficiency – which measures what you actually get for your tax dollars – is half, half, as high in Sweden as it is in the United States.
But of course, if you take in the world’s highest taxes and give less and less back, you don’t need a whole lot of bureaucrats to administer the spending programs. All you have to do is rake in the cash from taxpayers and then leave them to fend for themselves.
Sweden, incidentally, happens to have the longest waiting lists for health care in Europe, with the exception of Albania.. For more on the “efficiency” of the Swedish single-payer system – the crown jewel of the Swedish welfare state – check out this well-written paper.
The Economist, however, does not bother with such facts. They are out to sell the Nordic model as the Second Coming of the Welfare State:
Government’s share of GDP in Sweden, which has dropped by around 18 percentage points, is lower than France’s and could soon be lower than Britain’s.
Yes, it topped 60 percent in the ’90s. But keep in mind that financial transfers do not count here. Welfare checks, unemployment benefits, income security payments are financial transactions that don’t show up in GDP. A very large part of the Swedish welfare state is all about paying people not to work.
Taxes have been cut: the corporate rate is 22%, far lower than America’s.
Technically, that has not yet taken effect. But the big stumbling block for Swedish businesses is the conglomerate of labor security laws. Those laws have driven the exorbitant costs of labor – payroll taxes are more than twice as high as in America – to even higher levels and are part of the reason why the Chinese owner of Volvo Cars is slowly transitioning Volvo production out of Sweden. Labor laws also got in the way of saving SAAB and contribute to the decision by Volvo Heavy Trucks to move its mass transit bus manufacturing to Poland.
Back in the ’80s and ’90s Sweden lost almost all of its once-sprawling pharmaceutical industry. Ericsson, the world’s pioneering telephone company, is limping along today only because of its alliance with Sony.
Back to The Economist, who manages to get yet another welfare-state selling point wrong:
While Mr Obama and Congress dither over entitlement reform, Sweden has reformed its pension system.
And retirees are losing heavily, as the system automatically cuts benefit checks but continues to take money to the same degree from taxpayers. Right now there are mounting demands in Sweden for yet another reform to fix the gaping flaws in the reform from the ’90s. “Retired and poor” is becoming a national sport in Sweden (and sadly my mother is among those having to take a beating).
Its budget deficit is 0.3% of GDP; America’s is 7%.
It is very easy to balance the budget. North Korea has a balanced budget. Romania under Ceaucescu had a balanced budget. All you have to do is, to quote Obama, “tax the heck out of people”. It means nothing when it comes to how people actually live their lives.
The average Swede, by the way, has a standard of living that would qualify him for welfare in most states here in America.
And then, of course, The Economist brings up the shiny coin that Swedes always hold up when they want to sell their welfare state:
Sweden has a universal system of school vouchers, with private for-profit schools competing with public schools. Denmark also has vouchers—but ones that you can top up. When it comes to choice, Milton Friedman would be more at home in Stockholm than in Washington, DC.
Except for the tiny little factoid that if you want to start a private school you have to apply to the local public school district. If the district issues a certificate of need, you can go ahead and open your school. If the public school district thinks that there is no need for competition with their schools, they say no and you have nowhere else to go.
Also, The Economist forgot to mention that home schooling is illegal in Sweden, as are schools with a religious affiliation (except for islamic schools which are violating the law but allowed to continue to exist out of misguided political tolerance).
The rest of the Economist article follows the same line of snake-oil salesmanship. Their attempt at selling a used car wrapped in shiny coating is so full of questionable, superficial and sometimes outright false statements that it would take a thesis to account for all of them. This article is already 2,000 words long…
But fear not. I have finally gotten the material together for my new book, and will be submitting the manuscript this spring:
Sweden – Indictment of a Welfare State.
Europe was once the cradle of industrialization, freedom and prosperity. But since then they have indulged themselves in a highly irresponsible, short-sighted and long-term destructive entitlement mentality. That mentality, which was elevated to official state policy in the form of the welfare state, is now bringing country after country across Europe to its fiscal knees. The forces that built Europe into the world’s second wealthiest continent – only North America surpasses the Old World – have been brought to a virtual standstill by the relentlessly increasing burden of entitlements.
Among the victims of this entitlement mentality is the classic Western entrepreneurial spirit. For two generations now, Europeans have grown up to believing that government will serve them their basic needs for the rest of their lives. All they had to do, they were told (by teachers, parents, political leaders) was to find a nice little job somewhere, spend 37.5 hours per week in the office, take five, even six weeks of vacation every year, and wait for their comfortable retirement.
In reality, that worked for one generation. After that, the loss of the entrepreneurial spirit began withering away. The private sector, dominated by increasingly dinosauric, overwhelmingly bureaucratic corporations wa no longer challenged to renew itself. As each new generation of entrepreneurs grew smaller and smaller, the private sector became less and less productive.
The tax base stopped growing. But the welfare state did not. The result: an emerging economic wasteland, sinking into a permanent state of industrial poverty.
This full-blown picture has not dawned on the Europeans. Not yet. But they are beginning to see glimpses of it. Take, e.g., this story from Euractiv.com:
After a year of closures, sackings and cut-backs, arguments about how to turn European industry around will be to the fore this year as debate intensifies around the correct policy response, and doubts linger over the EU’s ability to deliver. A fall in the demand for steel of 8% during 2012 saw permanent closures of furnaces across Northern Europe, whilst others were mothballed in an attempt to stave off further closures.
This decline comes after about five years of recession. If Europe could recover from this, they would have done so already. I am increasingly convinced that this is a permanent decline, from which the continent – as it is politically organized today – simply will not recover.
European steelmakers have written down major investments as the supply of steel and nonferrous metals products continues to outweigh demand, reflected in results for key steel-users such as the automobile sector. French carmaker Renault’s decision on 15 January to cut 7,500 French jobs by 2016, followed similar announcements affecting the European operations of Fiat, Ford, General Motors, Opel and Peugeot.
And, again, this comes on top of the past few years of decline:
Between 2008 and 2012, 6.8 million jobs in construction and industry were lost across the EU, according to BusinessEurope, the group representing the member states’ largest business federations. “The severity of the crisis is producing a painful hangover,” said the group’s director-general, Markus Beyrer.
Then, of course, big brother government has to come to the rescue:
Antonio Tajani, European commissioner for industry, in October acknowledged “we’ve made mistakes in the past, we’ve let industry and SMEs fend for themselves for too long,” as he presented a review and re-launch of the Commission’s ‘Integrated Industrial Policy for the Globalisation Era’, first launched in 2010. Tajani declared the aim to raise industrial activity to 20% of EU gross domestic product by 2020, compared to 16% today, taking it back up to pre-crisis levels.
Another glorious pie-in-the-sky political proclamation that surely will help bring billions of jobs back in Europe. Absolutely. No doubt. For sure.
Fact of the matter is that government is the big, fat problem that brought Europe down to its knees. But as the Euractiv.com story explains, the last people on Earth to realize that are the Eurocrats who live high on the hog off the backs of Europe’s struggling taxpayers:
The strategy sets out six priorities for short-term action: advanced manufacturing technologies, key enabling technologies, bio-based products, construction and raw materials, clean vehicles, and smart grids. This approach was subsequently endorsed by the European Parliament and Council, responding in part to growing disquiet in the member states that the EU has paid a lot of attention to austerity, but made little effort to open markets to stimulate investment and growth.
Of course these politicians know better than the private industry what the private industry can do best. After all, these politicians are lawyers, or they have a degree in public administration. Some of them have worked for their political parties all their lives; others have held jobs in some tax-paid bureaucracy somewhere, waiting loyally for their party bosses to put them high enough on a ballot list to get elected.
Their experience in pushing a “yes” or “no” button (or, in the case of the current American president, the “present” button) definitely qualifies them for deciding what private enterprises should and should not be doing.
Definitely. Absolutely. No doubt.
Some, of course, simply refuse to see the long-term trend at work in Europe. Euractiv.com again:
“The picture is not as bleak as some of the stark figures suggest,” said the European Policy Centre’s (EPC) chief economist Fabian Zuleeg. Zuleeg says that even in the automobile sector, where the headlines appear most bleak, there remain many high-technology automobile-related industries providing much in-demand industry in Europe. “The plain problem is that there has been over-supply in that sector, and a re-modelling of the sector towards high-skilled factories – where the EU can compete – is necessary,” he adds.
Once again, we have to go back to good old Lord Keynes to understand the true nature of the problem. The EU economy, taken as a whole, has basically not grown at all over the past five years. Sizable portions of it are in fact smaller today than they were in 2009. Taxes have gone up, either directly or indirectly as a share of cost of living for most Europeans. The persistently uncertain outlook on the job market is holding back whatever spending consumers can still muster.
So long as the EU and the ECB continue to try to save death-bed tied welfare states across Europe by means of austerity, there is absolutely no chance that the European economy will recover. But even if they chose the “French” route and combined higher taxes with more government spending (where austerity combines higher taxes with less spending) the long-term outlook would not change. The underlying problem remains, namely that government keeps draining the private sector for resources that it desperately needs to produce jobs and prosperity.
Given the stubbornness with which the Eurocracy holds on to its austerity policies, the current political landscape cannot save Europe from going over the industrial poverty cliff.
Furthermore, so long as the Europeans continue to dwell in their entitlement mentality they will not recover from their decline. The more they sit around and expect others to fill their fridges and pay for their retirement, the more they will wait in vain.
Europe’s only chance is to end the welfare state and transition into a free-market based economy. Austerity won’t let that happen. Only a structural retreat from big government can do the trick.
While EU member states have been playing one-upmanship on budget cuts, trying to beat each other to the toughest reductions in entitlements, the European Union itself has been forced to execute its first-ever round of concerted budget cuts. The members of the EU parliament, who for three years now have been endorsing harsh austerity policies in individual member states, now have to abide by the same warped economic principles that they have been subjecting others to.
EU politicians will next month be directly confronted with the effects of their budget-slashing policies when disabled people from all over Europe gather in Brussels to voice their anger at having their allowances and services cut. Around 500 people are expected to make use of the “European Parliament of Disabled People” – an event last held almost ten years ago – on 5 December to tell EU leaders the obligation to protect disability rights remains despite the economic crisis.
This is a perfect illustration of how idiotic, frankly, it is to make large segments of mankind directly dependent on government for their very livelihood. The EU has made a promise to millions of disabled Europeans to provide for their needs in one form or another. At any point in time that promise has a specific value in euros, a value that is determined by the needs that the EU promises to meet. When the EU made that promise its decision makers – Eurocrats and Members of the European Parliament – did not even think once about what would happen if they one day woke up and realized they did not have enough cash to honor their promises.
The EU Observer again:
Jannis Vardakastanis, European Disability Forum president, said the disability movement is not simply “doing nothing and waiting for the worst to come.” “We have been protesting. We have been fighting in many countries,” he said at the recent launch of a study compiling evidence of the effects of austerity measures in the EU. The survey showed a rise in poverty levels among disabled people, cuts in basic services and a return to negative stereotyping across several countries. Vardakastanis cited his native Greece – bailed out twice by international lenders and obliged to implement swathes of austerity measures in return – to underline the importance of taking a stand: “I can tell you that because of the fight and the struggle of the Greek disability movement, the disabilities allowances of 200,000 disabled people have been fully protected from any cuts.”
So they have cut something else instead, like spending on hospital supplies, subsidies for pharmaceutical products and benefits for the unemployed.
It is notable that this organization for the disabled in Europe is not pursuing private solutions to the problems that the EU and national welfare states have promised to solve. There is an important reason for this. Once government barges in to a new area of our lives, with big and bold promises to take care of us, it wipes out all private alternatives. Whether by law or by means of its sheer strength, government cleans the table of competition, proclaiming itself as the supreme source of benevolence and the sole provider of compassion.
Behold the welfare state.
The only problem for the do-gooders behind the welfare state is Thatcher’s Theorem: eventually they run out of other people’s money. QED.
Unfortunately, as the EU Observer reports, the campaigners for Europe’s disabled are doubling down on being dependent on government:
An issue that Vardakastanis mentioned several times is fear of a return to viewing institutions as a solution to dealing with disabled people while cutting down on costs – a trend mentioned in the study. “It is difficult to make our dreams our reality but we will never accept to be put back in institutions,” he said, adding: “We are going to fight make our dreams a reality even in a period of crisis.”
The Eurocrats in charge of making promises with taxpayers’ money are just as dumbfounded over the effects of austerity:
Referring to the impact of austerity measures of people with disabilities, Jose Leandro, an adviser on socio-economic issues to EU Council President Herman Van Rompuy said: “This issue is completely absent from political discourse on the crisis.” “It is also absent in many cases from the minds of policy-makers who design the measures that are being implemented to fight the crisis,” he added.
Of course it is absent! Austerity policies are not designed to keep government’s spending promises – they are designed to look like they are keeping those promises. There is a world of difference between the two.
Europe’s disabled deserve the same freedom and opportunity as non-disabled citizens. It should be clear by now that government cannot provide that freedom, and is an entirely unreliable source of opportunity. Only a free society will do that.
This is a very long article. I tried to keep it as short as possible, but the topic does not lend itself to brevity. I therefore decided to let the discussion, not the format, determine its length.
The European debt crisis has reached such proportions that it is now threatening the political stability of many EU member states. This raises the important question of what the consequences will be for Europe’s chosen form of government, the parliamentary democracy. If voters in, e.g., Greece, Spain and Italy see that their democratically elected governments are not governing based on their preferences and desires, but taking marching orders from entities outside their country, will they at some point lose faith in their democratic system?
Not much attention has been paid to this issue. That is unfortunate: based on what is happening in Europe on an almost daily basis you cannot draw any other conclusion than that there is a slowly but steadily rising threat to democracy in the very part of the world that invented it.
Not everyone is turning a blind eye to the perils associated with the debt crisis. In the German news magazine Der Spiegel, Cordt Schnibben writes a good analytical piece about how the debt crisis is eroding the status of the parliamentary system. His conclusion is wrong – he blames the creditors who lend money to governments for effectively nullifying democracy – but his route to that conclusion is filled with good observations and pertinent questions.
Since Schnibben is German, he has a very wordy writing style. Therefore, his piece has spilled out into three long sections. For the purposes of reasonable brevity we are not going to discuss them all in great length, but instead highlight some of his main findings.
Be it the United States or the European Union, most Western countries are so highly indebted today that the markets have a greater say in their policies than the people. Why are democratic countries so pathetic when it comes to managing their money sustainably?
The answer is obvious: too much government spending. But as Schnibben shows, a longer answer can sometimes be instructive and helpful. This is especially true when it comes to the relationship between government indebtedness on the one hand and freedom and democracy on the other.
On to his first part, where Schnibben paints a grim but accurate picture of a Western world deeply mired in debt:
In the midst of this confusing crisis, which has already lasted more than five years, former German Chancellor Helmut Schmidt addressed the question of who had “gotten almost the entire world into so much trouble.” The longer the search for answers lasted, the more disconcerting the questions arising from the answers became. Is it possible that we are not experiencing a crisis, but rather a transformation of our economic system that feels like an unending crisis, and that waiting for it to end is hopeless? … Is it possible that financial markets will never become servants of the markets for goods again? Is it possible that Western countries can no longer get rid of their debt, because democracies can’t manage money?
The first question is of a more eclectic nature, but the question of how a democratic form of government can sustain under the heavy pressure from government debt takes us right to the frontline of the European crisis. The immediate reason for this is that all governments in the EU that are currently subjecting their citizens to harsh austerity policies are democratically elected. Large segments of the populations in austerity-hit countries are vehemently opposed to those policy measures. The tougher government gets on entitlements, the more serious the hardship that people suffer through. As their lives get tougher, people alienate themselves from their elected officials whose policies inflict that hardship.
So long as the only ones suffering are the poor and needy, a cynical observer could make the point that there won’t be enough voters around to vote for totalitarian alternatives to the democratic form of government. But I have never been a fan of political cynicism, and I also want to point out that the current austerity measures in Europe are eating their way into deeper layers of the population. Austerity is now entering the living rooms of the middle class.
Europe is not yet turning its back on democracy, but there are enough signs across the continent for everyone to be concerned.
It is important to keep in mind, though, that government indebtedness is not just a problem for democratic governments in Europe. We here in the United States are very wise to pay attention, in part because we are vulnerable to the same socio-economic mechanics as Europe, and in part because our culture of borrowing to pay for government entitlements is at least as old as it is in Europe. Schnibben again:
Until 1971, gold was the benchmark of the US dollar, with one ounce of pure gold corresponding to $35, and the dollar was the fixed benchmark of all Western currencies. But when the United States began to need more and more dollars for the Vietnam War, and the global economy grew so quickly that using gold as a benchmark became a constraint, countries abandoned the system of fixed exchange rates.
It is correct that the U.S. borrowing during the Vietnam War era was the beginning of the end of the Bretton Woods system of fixed international exchange rates. However, it is an irresponsible over-simplification to say that the deficits were driven by the war in Vietnam. During that same period of time the federal government created or significantly expanded a number of entitlement programs, the foremost among them being Medicaid and Medicare.
The emergence and expansion of the American welfare state is a key explanatory factor behind our persistent deficits. The Vietnam War ended in 1974, but the federal deficit prevailed.
Back to Schnibben, who makes an interesting point about financial-market deregulation and the proliferation of deficits in welfare-state budgets across the Western world. We need to examine this point in order to move on to the issue of whether or not democracy is threatened by the debt crisis:
A new phase of the global economy began, and two processes were set in motion: the liberation of the financial markets from limited money supplies, which was mostly beneficial; and the liberation of countries from limited revenues, which was mostly detrimental. This money bubble continued to inflate for four decades, as central banks were able to create money out of thin air, banks were able to provide seemingly unlimited credit, and consumers and governments were able to go into debt without restraint.
Not without restraint. The only reason why banks will ever lend money to private citizens with sub-prime credit is that governments create artificial conditions on the credit market. If banks do not have to accurately assess the credit risk of a sub-prime borrower, then obviously it will be more inclined to lend on that market than if free-market conditions prevailed.
The same goes for governments. They don’t borrow because there is easy credit available. They borrow because they have come up with a reason to spend money.
There is, however, an important element in Schnibben’s argument, namely the parallel between private and public debt. It is true that private debt ratios have grown by unhealthy numbers over the past few decades, but so has the cost of government. Taxes in the Western World are higher today than ever before, and the trend of rising tax ratios – taxes as share of private earnings – began about three decades ago. That was the point in time when government spending in many welfare states had grown past the magic 40-percent of GDP mark.
Beyond that point, it becomes too costly for the private sector to absorb and adapt to the costs of government. Instead they simply choose to go into long-term decline. This affects GDP growth over time, which in turn leads to an erosion, in relative terms, of the tax base. Government spending, on the other hand, continues to grow as per the preferences of our elected officials.
As a result, we see persistent deficit problems in every welfare state. This in turn motivates government borrowing and a monetization of the deficits. Hence the point Schnibben makes. But it is also important to note that higher taxes make it increasingly difficult for middle-class families to finance a house, a car, even furniture, appliances or other long-term items. Germany is one example of what this can lead to; the Spanish mortgage crisis is another example.
Schnibben then goes on to his second part and addresses the consequences this debt accumulation has for democratic government:
The one sovereign stalks the other, while the pressure of the markets contends with the pressure of the street. In Europe, in particular, this has become an unequal battle. Since Jan. 14, 2009, when Standard & Poor’s downgraded Greek government bonds, the markets have determined the direction and pace of European integration. They want bigger and bigger bailout funds, they want to safeguard their claims, they want a European Central Bank that buys up government bonds indefinitely, they want slashed government budgets, they want labor market reforms like the ones in Germany, they want wage cuts such as those in Germany and, at the same time, they want these incapacitated countries mired in recession to offer the prospect of healthy growth.
This is where Schnibben goes wrong. He gives the impression that the credit rating institutes somehow dictate the economic policies of heavily indebted European countries. That is not true: the governments in Greece, Italy and Spain are bound to the last euro they spend by dictates or nosy oversight powers from the EU, the ECB and the IMF. The Italian prime minister is not even elected by the Italian people – he is a bureaucrat appointed by the three aforementioned organizations.
The Greek austerity programs that have decimated the economy over the past three years were not forced upon Greece by Standard & Poor; they were put in place by the European Union in exchange for loans that provided fiscal life support for the government.
Schnibben implies that the credit rating institutes have replaced the legislative part of government in indebted countries. But credit rating institutes only respond to how countries handle their debt. It is not their fault that Greece has accumulated a debt and thereby has made itself a ward of the EU. If anyone outside of Greece has taken over that country, it is the eurocracy in Brussels.
Despite missing this point, Schnibben correctly argues that the indebtedness of Europe’s governments reinforces the mistrust that has already created a rift between European institutions and national governments, and between national governments and their voters. He then makes an interesting and provocative observation:
The democratic decision-making process reaches its limits in this fundamental crisis, but even in the decades when debt was being accumulated, it was clear that democracies have a troubled relationship with money. There was always justification for new debt. The catchphrases included things like more jobs, better education and social equality, and the next election was always around the corner. Debt was justified at the communal level to expand bus service or build playgrounds, at the state level to hire more teachers or build bypasses and, at the federal level, to buy tanks and fund economic stimulus programs.
This problem has been exacerbated by the expansion of entitlement programs that make endless commitments of cash or in-kind services to “entitled” citizens. These programs reached their full “maturity” in the ’70s and came with tax increases. Those increases in turn caused a permanent slowdown in GDP growth all across Europe. (The United States did not reach this point until after the Millennium recession.) As a result the tax base eroded and Europe’s welfare states found themselves dealing with perpetual budget-balancing problems.
What to do? Politicians who had created the welfare state ruled out spending cuts. That of course did not solve the problem: tax revenue shortfalls despite record-high taxes led governments into accumulating debt.
Schnibben misses out on this aspect, but his point about a long-term trend in debt is nevertheless valid. Then he reaches one of the most provocative parts of his analysis:
A closer look at which countries acquire and pay off debt, and to what degree, reveals unsettling correlations: The more often governments change and the more pluralistic they are, the faster the debt increases and the more difficult it becomes to pay if off. The more democracy, the looser the money.
Apparently, once again mankind has proven that when people can vote themselves free money, they’ll do it…
Just to drive home the point about how difficult it is to rein in this kind of structural deficit, Schnibben explains:
To hold an administration responsible for the debts of its predecessors, there are debt limits in democracies. In Helmut Schmidt’s day, for example, there was a provision in the German constitution stipulating that total debt could not exceed total investment. In Europe, the provisions of the Maastricht Treaty, which is aimed at ensuring the stability of the common currency, limit the amount of debt a government can accumulate to no more than 60 percent of gross domestic product. So far, such debt limits have never worked in any country.
In addition to the problem with the ideologically driven welfare state, there is also a problem of a cultural shift. Before the welfare state people defined progress as them being able to make more money, expand their business, climb up the career ladder or in other ways bettering their own lives – based on their own work. By contrast, under the welfare state progress becomes associated with more spending on entitlements.
Living off someone else’s money becomes part of the culture. When you run out of that someone else’s tax money you borrow to keep “improving” and making “economic progress”.
This cultural shift from self determination under a limited government to self subjugation under a welfare state has been hard to grasp for Americans, but the 2012 election probably provided a glimpse of what this means in reality. This new culture has almost become part of the European genome, and once our welfare state has reached European proportions we will inevitably experience the same type of cultural metamorphosis. (This is why we need to end the welfare state, not just rein it in.)
Since entitlement spending almost by definition grows faster than tax revenues, this cultural shift reinforces a trend of perennial budget deficits. As Schnibben explained, that trend is strong enough to blow right through any legislatively imposed debt limit.
So where do we go now? Do we sacrifice democracy, acknowledging that it does not work because people will always vote themselves a slice of someone else’s pie? Schnibben draws his conclusions in the third part, but unfortunately he goes really wrong. Asking three questions, he turns on capitalism and the free-market economy:
First, how can a debt-ridden economy grow if a large part of demand in the past was based on debt, which is now to be reduced?
This is fairly simple. Structurally reform away the welfare state, cut taxes proportionately to each reform and restore the self-determining individual that was the foundation of the economic success of Western Civilization.
Schnibben’s second question:
The second major problem of modern capitalism is this: How can the unleashed financial markets be reined in again, and how should the G-20 countries come up with joint rules for major banks, which are their financiers and creditors, and for markets, which punish and reward these countries through interest? How much freedom do financial markets need to serve the global economy as a lubricant, and what limits do they need so that banks, shadow banks and hedge funds do not become a threat to the system?
Once again: the current crisis was not caused by banks. It was caused by:
a) Entitlement-minded politicians in America who thought that it was everyone’s right to own a home, who therefore took over most of the mortgage market in order to incentivize, encourage, strong-arm or force banks into giving loans to people with as low a credit score as 480;
b) Likeminded politicians in Europe, primarily Spain, who wanted to make sure that people who made less than $19,000 per year could get a mortgage loan; and last but absolutely not least,
c) Spending-addicted politicians whose relentless expansion of the welfare state has created fiscally unsupportable entitlement programs.
When welfare states cause budget deficits, governments issue treasury bonds. Up until a couple of years ago such bonds from Western countries were considered iron-clad investments. As a result, lenders asked for very low interest rates.
Today, we know that welfare states can default on their loans – it is called “debt restructuring” or something similarly fanciful, but it is always, at the end of the day, a partial default where lenders are forced to forgive part of the loans. This has of course led lenders to demand higher interest rates, for the very same reason as someone with excellent credit gets a lower interest rate than someone with a fair credit rating.
This simple fact is hard for many analysts, talking heads, politicians and other pundits to grasp. Perhaps it is easier for them to do so if they ask themselves: would I rather lend $100 to my hard-working, always-reliable brother, or to my other brother who drinks, can’t hold a job and always has a stupid story to tell to explain why he needs to borrow from you?
Bottom line: banks were roped into the current crisis by lending to private citizens based on artificial credit market conditions, and by lending to governments that had promised more spending than they could ever earn from taxpayers. Their crisis is a symptom, not a cause, of the real crisis.
Schnibben’s third question reinforces the impression that he is not entirely clear as to what has caused the debt crisis:
Third, how do governments mediate between the power of the two sovereigns, how do they reestablish the primacy of citizens over creditors, and how does democracy function in debt-ridden countries?
End the welfare state. That is the only way for the Western world to avoid going over the fiscal cliff.
Again, Schnibben makes a good point that democracy is in danger in countries that are about to default, or already have defaulted, on some of their debt. But the threat does not come from credit rating institutes or banks – it comes from people whose lives are being destroyed by austerity. They lose faith in democratic government because the democratic government is the one subjecting them to hardship.
It would be a terrible mistake – a fateful one in fact – if the West decided to try to get out of its crisis by crippling capitalism and the free market even more than is already the case. The welfare state cannot live without a functioning free-market economy.
On the other hand, the free-market economy can live without the welfare state.