Tuesday, September 4, 2012

“The Slippery Slope of the Welfare State”

Sydney M. Williams

Thought of the Day
“The Slippery Slope of the Welfare State”
September 4, 2012

Last week I attended a colloquium in Prague, entitled “Nation, Economics, and Liberty in the European Union.” The event was hosted by the Liberty Fund, which is based in Indianapolis, and the F.A. Hayek Institute whose home is in Vienna. The discussion leader for the two-day session was the head of a think-tank located in Berlin. In all, there were nineteen people, representing three continents and nine countries. As one could tell, given the hosts, those present were advocates of democracy, the rule of law, open markets and, of course, free and responsible individuals. The group was comprised mostly of academics, with a smattering of writers and representatives from the financial industry.

We discussed the origin of both the European Union and the Eurozone, the wishes of the founding fathers and the documents that purport to represent the goals of both the Union and the single currency. We attempted to understand if the Union and the currency might succeed. I heard nothing that altered my view that the currency will either collapse or be greatly altered, and that the real focus should be on preserving the Union. Apart from the Balkans, the Continent has gone for sixty-seven years without war, likely the longest time in a thousand years; thus continuing that tradition should be at the forefront of European politics. Both Martin Feldstein and Milton Friedman, among others, warned a dozen years ago that the introduction of the Euro might aggravate differences among the member states, not reconcile their differences.

As much, our concern was the increasing role of omnipresent and supposedly omniscient governments that retard individual responsibility while fostering dependency. Advocates for a more powerful state argue that their concern is the wellbeing of the less fortunate among us. Their answer is that only government can be responsible for the aged, the poor and the incapacitated. At times it seems that the Left forgets that man is a communal animal, both in the sense of living productively within a community and in his innate sense of responsibility to others. It can be argued, perhaps, that the aged, those alone and the indigent were not well enough provided by private sources, but it is not as though they were ignored. From my perspective, government does have a role in this regard. The question is one of degree. Over the past several decades, the pendulum has been swinging toward increased statism, certainly in Europe, but also in the United States. Both political parties in the U.S. have helped its trajectory. However, we have reached a tipping point that breeds dependency and diminishes responsibility. The negative consequences will be a hobbled private sector and, therefore, a diminished economy and increased poverty. It becomes a vicious cycle. Welfare reform, passed by the Republican House in 1996 and signed by President Clinton, was, significantly, called the Personal Responsibility and Work Opportunity Act. The changes President Obama recently made to the Welfare program have had the effect of attenuating the meaning of “responsibility” and “work.”

The basic problem with government assuming an ever-increasing role is the concomitant loss of personal freedom. Bans on drunk driving, polluting our drinking water, or reckless airline pilots are prices all of us are willing to pay, even as they diminish our rights. Freedom is desirable. Anarchy is not. Society justifies the forbidding of smoking in public places because it impairs our health. Not being a smoker, I appreciate the fact that my quality of life has improved, but I recognize that in so doing the state has impinged on the rights of smokers. When Mayor Bloomberg bans “sugary” drinks larger than 16 ounces, is that reduction in freedom a cost worth bearing? Should the mayor be the one that determines whether it is alright for a mother to bottle feed her newborn baby? Where does the line get drawn between what is in the interest of the many versus those of a few? When is enough control enough? When a man overeats, is the fault MacDonald’s or does blame lie with the man? Does personal responsibility even have a role to play in this new world? Class action suits have helped perpetuate the shifting of responsibility from individuals to institutions – preferably those entities with plenty of cash; so that tort lawyers can live well. Keep in mind that the Association of Trial Lawyers is one of the largest contributors to the Democratic Party.

Many on the Left feel that an elite few should make such decisions, as they are “better informed” than the masses, but I find such thinking offensive and demeaning. When the President is stymied by gridlock in Washington, he bypasses the legislative process and implements executive directives. Presidents from both parties have been guilty of such measures, but uniformity among executives does not right a wrong.

Politicians obsess over what government can provide, instead of asking, as President Kennedy did, what people can do for their country and themselves. Though those in Washington couch these programs in eleemosynary terms, the reality is that they do it because it is a means of buying votes. According to the U.S. Census, 100 million Americans (almost a third of the population) are today on some form of welfare assistance, including Social Security and Medicare. In the second quarter of 2012, 225,000 jobs were created, while 246,000 people were added to the Social Security Disability Rolls. Since 2008, the work force in America has declined by 1.3 million, while the Disability Rolls increased by 3.6 million. (Keep in mind that about 1.5 million people enter the workforce each year.) Roughly half of all workers pay no income tax, while the top one percent of all taxpayers pay 40% of all taxes and the top 10% pay 70% of all taxes. The President speaks of “fairness”, but what is fair? Should the top one percent pay 50%, 75%, or 100% of all taxes? How far does he want to go? He doesn’t say.

In the August 19th issue of the Washington Post, Larry Summers wrote that shrinking government, despite comments from Republicans, is impossible. He suggested that increases in spending were inescapable. He cited factors like demographics (the aging of Americans) and the inevitability of higher interest rates on the accumulation of even more debt. He wrote of corroding infrastructure and unfunded healthcare and pension liabilities. The only area of spending that could be reduced, according to him, was defense; though he added that such cuts “in a dangerous world” were unlikely. It was a stunningly pessimistic view.

The march toward a welfare world brings with it its own costs. First of all it requires a lot more spending on entitlements, which means layering on even more debt. Tax rates would be raised. However, as Art Laffer demonstrated more than thirty years ago, a tax rate of 100% and a tax rate of 0% generate the same mount of revenue – none. The art of taxation is determining the optimum level of rates: the rate that permits the most revenue with the least cost to economic growth. Higher tax rates are inevitably accompanied by increases in deductions and credits, ironically favoring the wealthiest. A flat tax, or significantly flatter tax, would yield higher returns, while discouraging the wealthiest from hiding or disguising income. With government consuming a growing slice of GDP, the private sector, definitionally, becomes less productive. And it is the private sector alone that feeds the beast that is government. It is impossible to have a rapidly growing economy with an increasingly large government. The laws of diminishing returns don’t allow it.

A second concern is the quagmire of dependency that a welfare state creates, producing increasingly less productive individuals. As responsibility diminishes, individual freedoms evaporate. But the problem of dependency extends beyond individuals. The cronyism that has developed between government and banks has created financial institutions that we can no longer afford to bail out, yet are too big to fail. Cronyism between government and large corporations serves to protect the big guys while imposing needless regulation on small and start-up businesses. Banks and large companies are as dependent on government as is the individual who survives on Social Security and Medicaid, or the out-of-work individuals who enhance their unemployment benefits by applying for Social Security Disability. It has always been the prospect of bankruptcy, that has kept bankers and businesses (as well as individuals) prudent. Remove that threat and we set ourselves up for a repeat of September/October 2008.

We in America are fortunate in that we can see in places like Greece and Spain what the bottom of that slippery slope looks like. Spain has 25% unemployment. Greece’s is 20%. These are depression-era conditions. Their economies are frozen and their governments are finding it impossible to adjust. Kicking the can down the road, begging for time, is not an answer. There are two possible ways out. One involves confiscation of the means of production by government – Socialism. The other lies in freeing the individual, so that his or her creative talents can be allowed to expand. That means less regulation, lower taxes and providing the conviction that such programs are permanent. There is no Garden of Eden on Earth, where everybody achieves equal results. There always have been rich and poor, strong and weak, healthy and sick. Government should be there to allow their economy to grow as fast as possible, while maintaining a minimum safety net.

But, we put it all at risk, if we allow politicians, in their pursuit of personal power, to buy votes, endangering the same people they purport to help. They endanger them by making them more dependent. To borrow the old Chinese proverb, it may be fine to give a man a fish, but it is far better to teach him to fish. Democracies are fragile and must be nurtured. James Madison and John Adams, among others, warned of the risks of democracy. A quote that has been attributed to Alexander Fraser Tyler (1742-1813) says: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover they can vote themselves largesse from the public treasury.” Nevertheless, democratic capitalism has been by far the fairest, most productive form of government yet devised. It has reduced poverty levels around the world, while promoting individual freedoms.

The purpose of government is not to make our lives more comfortable. We hope that may be a consequence and certainly democratic capitalism and individual freedom have done that thus far. The purpose of government is to create a system where man can live in societal conditions, under the rule of law, not of men; and where man can be free to exercise his will. It is a form of government in which the aspirational can do well – one that rewards meritocracy. However, each new mandate from the Executive Branch or each stifling piece of legislation from Congress serves to grease the slope we are on and diminishes the individual freedom of each one of us.

I left the meeting in Prague with the sense that we in America have some time – not much, but some time – to at least temper our decline toward the Welfare State. Professor Summers is right about demographics and interest rates. They will create even more forceful headwinds. I was disappointed that he didn’t address the dire consequences of inaction – of not explaining that the entitlement state risks wrecking our democratic capitalist system, and I wondered why he did not make explicit that an increase in dependency retards the development of the responsible citizen. These are reasons why this election should be so important to every American. Europeans are not offered the choice we have. Their decline seems inevitable. They may be able to slow it, but it is hard to see the trend being reversed. We, in America, on the other hand, have an opportunity to restore a system that relies on the ingenuity and hard work of responsible individuals.

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