Monday, December 10, 2012

When the Edward Gibbon of the 22nd century comes to write his History of the Decline and Fall of the West, who will feature in his monumental study of the collapse of the most successful economic experiment in human history? In this saga of the mass suicide of the richest nations on earth, there may be particular reference to those national leaders who chose to deny the reality that was, from the vantage point of our future chronicler, so obviously looming. \
But for us, right here, right now, it matters that Barack Obama and George Osborne are playing small-time strategic games with their toy-town enemies while the unutterable economic truth stares them in the face.  Mr Obama is locked in an eye-balling contest with a Republican Congress to see who can end up with more ignominy when the United States goes over the fiscal cliff. It is clear now that the president will be quite happy to bring about this apocalypse – which would pull most of the developed world into interminable recession – if he could be sure that it would result in long-term electoral damage to his opponents.
 Supposedly from opposite sides of the political divide, the US president and the British Chancellor come to a surprisingly similar conclusion: it is not feasible to speak the truth, let alone act on it. The truth being that present levels of public spending and government intervention in the US, Britain and Europe are unsustainable. The proportion of GDP which is now being spent by the governments of what used to be called the “free world” vastly exceeds what it is possible to raise through taxation without destroying any possibility of creating wealth, and therefore requires either an intolerable degree of national debt or the endless printing of progressively more meaningless money – or both.
How on earth did we get here? As every sane political leader knows by now, this is not just a temporary emergency created by a bizarre fit of reckless lending: the crash of 2008 simply blew the lid off the real scandal of western economic governance. Having won the Cold War and succeeded in settling the great ideological argument of the 20th century in favor of free-market economics, the nations of the West managed to bankrupt themselves by insisting that they could fund a lukewarm form of socialism with the proceeds of capitalism.
What the West took from its defeat of the East was that it must accept the model of the state as social engineer in order to avert any future threat to freedom. Capitalism would only be tolerated if government distributed its wealth evenly across society. The original concept of social security and welfare provision – that no one should be allowed to sink into destitution or real want – had to be revisited. The new ideal was that there should not be inequalities of wealth. The roaring success of the free market created such unprecedented levels of mass prosperity that absolute poverty became virtually extinct in western democracies, so it had to be replaced as a social evil by “relative poverty”. It was not enough that no one should be genuinely poor (hungry and without basic necessities): what was demanded now was that no one should be much worse (or better) off than anyone else. The job of government was to create a society in which there were no significant disparities in earnings or standards of living. So it was not just the unemployed who were given assistance: the low paid had their wages supplemented by working tax credits and in-work benefits so that their earnings could be brought up to the arbitrary level which the state had decided constituted not-poverty.

The paradoxical effect of this is that the only politically acceptable condition is to be earning just enough to maintain independent life – and not a penny more. Everybody is steered by the penalties of the tax system or the gradual withdrawal of benefits into that small space in the middle between being “rich” and being (relatively) poor.

Capitalism is, by its nature, dynamic: it creates transitory disparities of wealth constantly as it reinvents itself. Fortunes are made and lost and, as old industries are replaced by new, the earnings that they create rise and fall. Punishing those who exceed some momentary average income and artificially subsidising those who fall below it – as well as providing for a universal standard of living which bears no relation to merit or even to need – has now reached the unavoidable, unaffordable end of the line.
So who will tell the truth – and then act on it? Who will say not just that welfare must be cut, but that in future MEDICARE will need to rely on a system of co-payments? That people will have to provide for their own retirement because Social Security will be frozen? That without a radical reduction in government intervention, the free and prosperous West will have been a brief historical aberration?


Baxter said...

This piece by Janet Daley in the Telegraph is rather hysterical. First - she is attacking both President Obama and George Osborne - the UK Conservative Party Chancellor of the Exchequer. So, she apparently doesn't cotton to the center or right of the political spectrum. Or, is it possible that she occupies that tiny space to the right of conservatives?

Her statement that "present levels of public spending and government intervention in the US, Britain and Europe are unsustainable" is disingenuous and intentionally vague. Public spending in the US is a fraction of European levels. Why lump them together? The extraordinary government intervention - on both sides of the Atlantic - was necessitated by the 2008 collapse and is temporary. It has, thus far, avoided a second great depression.

If the world follows the policies of Bernanke and Obama, this dangerous moment will pass and we will see rising GDPs along with shrinking deficits. That would be unfamiliar territory for the likes of Reagan and Bush and most reminiscent of the Clinton Era.

Jim G. said...

In January 2010, President Obama described the challenge well: "The major driver of our long-term liabilities . . . is Medicare and Medicaid and our health-care spending. Nothing [else] comes close."

The nonpartisan Congressional Budget Office agrees. According to the CBO, virtually 100% of the projected increase in budget deficits over the next 75 years comes from rising Social Security, Medicare, Medicaid and other mandatory spending.

The CBO projects that as the economy recovers, revenues will exceed the historical average of 18% of gross domestic product, even if all 2001 and 2003 tax cuts are extended. Federal spending, meanwhile, already exceeds its historical average of 20% of gross domestic product and is projected to rise to 40% within three decades. Much of this dramatic increase in spending will be the result of adding 77 million baby boomers to a Medicare system that, for the typical retiree, provides benefits of $3 for every $1 paid into the system.

Taxes cannot be raised high enough to chase the enormous spending growth projected—the math simply does not work. That is why House and Senate Republicans last year voted for a budget to begin reining in entitlements and closing the deficit.

President Obama's plan to deal with the fiscal cliff includes raising taxes on individuals and small businesses that make over $200,000 or, jointly, $250,000 a year. He has argued that we should repeal the 2001 and 2003 upper-income tax cuts because they are to blame for much of the increase in the deficit since 2001.

There is a continuing debate over whether and how to raise taxes on small businesses that pay their taxes as individuals and on those individuals earning more than $200,000.

However, CBO and Tax Policy Center data together show that only 4% of the $12 trillion swing from projected surpluses to actual deficits from 2002 through 2011 resulted from the upper-income tax cuts. Two recessions and soaring government spending were the main factors.

Ending all the upper-income tax cuts would pay for just nine days of annual spending. Social Security and health entitlements will cost 27 times more than the revenue from ending those tax cuts over the next decade.

Baxter said...

Your third paragraph notes that revenues will exceed the 18% historical averages without raising taxes. That is true, however, 18%/GDP isn't nearly enough if we are to have Social Security, Medicare, and a hardy Defense. We need revenues of 22% - 24% of GDP, especially if we intend to pay down the debt.

Are tax hikes on the wealthy enough? Not nearly. I advocate the expiration of all the Bush tax cuts, 80% of which hit incomes under $250K.

Do we need entitlement reform to meaningfully reduce the spending curve and balance the budget? Absolutely. For starters, I'd gradually raise the age of Medicare/SS eligibility to 69 by two months per year. Further, I would give the health care panel on cost effectiveness responsibility for keeping costs in line with resources. So long as our resources are finite, there will be rationing in one form or another.

I hope, but do not expect, a blueprint to balance the budget and begin to pay down the debt in 8 years or so...

Jim G. said...

More pointless bilge.

Yes, the President has everything going his polltical way, offering the pseudo fantasy that raising taxes on a small slice of Americans will make a whit of a difference.

Yes, as always the Republicans are talking about cutting entitlements and the Democrats are resisting them and "defending" the poor.

Ms. Daley is right, when the history of our decline is written, one hopes that President Obama and the Democrats will not be able to avoid responsibility for the lack of entitlement reform.

Good ideas Baxter...too bad NO ONE on your side is proposing them...NO ONE...As Rome burns, the Democrats....NOTHING

We are quickly going broke.

BTW, I do support allowing the job killing tax increase on the "rich", allowing once and for all, for our President to get stuck with the comming repeat recession, which our economy is ill equiped to handle.
I again tire.

Baxter said...

What have Republicans proposed the balance the budget? The Ryan Plan proposes to balance the budget in 28 years! You guys got nuttin'...

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