Thursday, February 28, 2013

“It Can’t Happen Here”

Sydney M. Williams

Thought of the Day
“It Can’t Happen Here”
March 1, 2013

The title of this piece does not refer to sequester whose start we celebrate today. It is the title of a 1935 novel by Sinclair Lewis. The book was written at a time when Fascism was rising in Europe and concerned itself with the possibility that the United States could also fall victim. As we know, that did not happen. But that does not mean we are forever safe.

Today, Europe is dealing with the unfortunate consequences of its post-war experiment with the welfare state. This time, in my opinion, we are more vulnerable for at least two reasons. First, the trend toward a welfare state is subtle and seductive, slowly drawing people in, providing the state more control, often under the banner of fairness. Second, mainstream media is alert to authoritarianism from the right, but is, in fact, complicit when it comes from the left.

Capitalism has served the western world well over the past two centuries. Standards of living have risen for all and the abject poverty that exists in non-capitalist societies is non-existent. The best example is the contrast between North and South Korea. In 1953, both were devastated by war. Six decades later, South Korea is almost twenty times wealthier. However, as Jerry Z. Muller, a professor of history at the Catholic University of America, writes in the current issue of Foreign Affairs, it is true that capitalism does create a rise in inequality. Those who are more aspirational, who have greater abilities are able to succeed where others do not. As nations become wealthier there is an increased concern for the welfare of the “have-nots.” They are provided with expanded entitlements. The unfortunate consequence is to make them increasingly dependent. That dependency helps perpetuate and deepen what becomes a vicious cycle.

Professor Muller’s conclusion is that some way must be found between the Charybdis of privilege and the Scylla of resentment. He writes, “…the right should accept that a reasonably generous welfare state is here to stay, and for eminently sensible reasons…The left, in turn, needs to come to grips with the fact that aggressive attempts to eliminate inequality may be both too futile and to expensive.” While I agree that compassion is an admirable trait, I would add that aggressive attempts to foster fairness and equality will destroy the very spirit of capitalism, which is the fountain of our nation’s wealth.

During World War II, Winston Churchill humorously described capitalism: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of misery.” His ironic observation has relevance to today’s debate, as it reflects the mindset of socialism.

Nevertheless, a balance should be found. Unfortunately, human nature has a tendency to push pendulums too far in both directions. Whether as a nation or as individuals, we start out as poor. And, if fortune smiles and if aspiration is present; if talent exists and there is a willingness to work hard, we may gradually becoming wealthy. As nations become rich, all boats are lifted. But as time goes on, those that get left behind become insecure and resentful. Government steps in as saviour, to care for the wellbeing of the sick, the elderly and the indigent. Inevitably that trend leads to dependency and an increased emphasis on redistribution. All of us accept some level of redistribution. Keep in mind, a progressive tax code, which most of us support, is redistributive by definition. At some point, though, redistributive policies become counterproductive. The question swirling around Washington and in the editorial offices of the nation’s press is, have we reached the point where disincentives to produce have negatively impacted our economy? That certainly seems to be the case in Europe.

The expense of the welfare state is exceeding the Eurozone’s ability to prosper. Eurozone GDP declined 0.5% in 2012 for the third year out of four and with the fourth quarter down 0.9%. Unemployment is close to 27% in Spain and Greece. Italy’s elections last week showed a country in desperate turmoil. France recently announced it would miss its deficit reduction targets because of diminishing growth prospects. The prognosis for Europe is not sanguine. And their present is our future.

While the European political class believes that the Euro crisis hit its high point last summer, Bernard Connelly, in an interview in last weekend’s Wall Street Journal, said, “But from the perspective of real live people the situation is just getting worse and worse.”

Prophets are rarely recognized in their time and the interview with Mr. Connelly was an eye-opener. In the Book of Matthew, Jesus is quoted, “Only in his hometown and in his own house is a prophet without honor.” Seventeen years ago, Bernard Connolly was running the European Commission’s Monetary Affairs Committee responsible for introducing the Euro. He had doubts, and expressed them in a book, The Rotten Heart of Europe. It was a prophetic prediction, but a politically incorrect step. Despite the correctness of his forecast, it cost him his job and his pension. He became a private economist, and in 2003 described the U.S. economy as a debt-driven Ponzi scheme. At the time, Federal Reserve Chairman had cut the Fed Funds rate to 1%. Mr. Connelly, according to Brian Carney of the Journal who interviewed him, said that in 2003 he predicted interest rates would have to fall even further in the next cycle to keep the scheme going – another prophecy that has materialized.

Mr. Connelly argues that the cause of the crisis was a massive bubble created by monetary policy, tied to the introduction of the Euro. Undisciplined states like Greece, Ireland and Spain suddenly saw their cost of money decline. As a consequence “money was flowing into these countries out of all proportion to the opportunities available.” Could one not argue that with Fed Funds now at virtually zero for four years the same situation has been created in the U.S.? Commodities have risen; stocks and bonds have experienced bull markets, but the economy is languishing in the U.S., and is in decline in Europe. It is true that housing has retreated from the brink, but it has not been strong enough to improve labor markets. While the federal government has increased its borrowings by about $6 trillion, it has resulted in less than half a trillion in additional GDP. And there are still three million fewer people employed than there were in 2009.

Europe’s future has obviously not yet been written. But the question must be asked: How long will Germany be willing to fund the welfare of their more reprobate neighbors? If France is added to the list of those dependent on Germany, how long will Berlin persist in supporting them? German reunification, according to Mr. Connelly, has cost the former West Germans about 5% of GDP a year. That cost was bearable because they were reuniting their country. But there is no sense of a European demos.

I would suggest that the real genesis of Europe’s problems is a blind belief in the sustainability of a welfare state, despite the growing pressures it brings to the productive elements of society. Europe is aging and, in general, is not replacing its population, placing additional pressure on the young and those still working. Additionally, its character is changing, as the dominant growth element within its population is the still rising birthrates among Muslims. That inevitably will lead to more change. The success of the Golden Dawn party (a neo-Nazi party) in Greece’s last election should serve as a shot across the bow for the continent and for America.

The parable of Snow White should not be lost on Europe’s leaders or ours. What seems beautiful and perfect may be nothing more than our own imagination and reflection, warped by the contours of a faulty mirror. The concept of solving society’s ills through redistribution may be based on good intentions, but it is the unintended consequences that should concern us. Writing in Thursday’s Investor Business Daily, Ralph R. Reiland quotes a directive issued by the State Council of the People’s Republic of China: “Narrowing the income gap is essential for ensuring social justice and social harmony. We need to raise income levels of the poor and adjust taxes on the exceedingly wealthy.” Those words have a striking resemblance to those of our President, and that should worry us all. For, while China is becoming an economic powerhouse, it has no rule of law; it does not honor property rights, and its history of human rights is abysmal.

When schools do not require English to be the language of instruction , we place immigrant children at a disadvantage in their subsequent life as productive adults. When our government creates dependency, we subject those that have become dependent to a life of servitude. For more than three centuries, America has been fortunate. The earliest settlers found an abundance of resources and an insufficiency of natives. Our Founding Fathers were uniquely honorable, just and intelligent. Capitalism and free enterprise flourished. Immigrants flocked to our shores, bringing talent and a willingness to work hard. We became over time the richest, most powerful nation on earth. But what has happened in recent years? We are rapidly losing ground. According to the World Bank, we rank 6th in protecting investors, 13th in staring a business; 17th in dealing with construction permits and in education; 19th in getting electricity; 22nd in cross-border trading, and 25th in registering property. High taxes and excessive regulation have made the United States one of the more difficult nations in which to operate a business. Our public elementary schools are not educating students for a globally competitive world. While we graduate more college students, too many leave uneducated and unprepared. And we are breeding dependency, while depleting personal responsibility. In doing so, we are losing our moral compass.

This should not be happening. There is a roadmap, which is Europe. Those who believe that what is happening over there may not be our fate are naive. This time it could happen here.

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