A self-perpetuating political class

The “Disgrace” of the Majority

To the disbelief of left-wing media, most Britons want a referendum on EU membership.

By THEODORE DALRYMPLE

An editorial in the Guardian on October 25 exposed the nature of what often is called “the European project”: a goal that those pursuing it never state out loud. In brief, it is the construction of a huge power bloc under the domination of a self-perpetuating political class and its auxiliary nomenklatura, free of the most minimal democratic oversight or constitutional restraint.

The editorial was titled “Conservatives and Europe: learned nothing, forgotten nothing,” a reference to Talleyrand’s famous dictum about the Bourbons. Britain’s Conservative Party, the editorial argued, was unfit to govern because of its continued internal division on the issue of the U.K.’s membership in the European Union, the latest manifestation of which was a vote by 80 Conservative members of Parliament in favor of holding a referendum on the issue. A Guardian poll, published in the paper on the same day as the editorial, established that 70 percent of the population believed that such a referendum should be held; 49 percent wanted to leave the union and 40 percent wanted to remain in it (11 percent were undecided).

One can make many criticisms of the Conservative Party, but surely one such criticism is not that 80 of its members of parliament have voiced the disquiet of at least half the nation’s population about the most important question that it faces. The Guardian called the 80 members of parliament “a disgrace,” by which it meant that the opinion of fully half of the population, and possibly more, should not even be heard in the Mother of Parliaments. In other words, the philosopher-kings of the European nomenklatura should be allowed to get on with their work free of interference—because, after all (and as new evidence further proves every day), they are doing such a fantastic job.

Houston, we have a problem!

Stealing as Policy, from the Iron Curtain to Robert Byrd

At least my former boss Ceaucescu was honest about it.

By ION MIHAI PACEPA

History often repeats itself, and if you have lived two lives, as I have done, you may have a chance of seeing that reenactment with your own eyes. “Stealing from capitalists is our duty,” I repeatedly heard Nikita Khrushchev shout. “Don’t raise your eyebrows, Comrades. I intentionally used the word steal. We have a historical duty to steal from capitalists.”

“Stealing from capitalists is our historical duty,” I also often heard my former boss, Nicolae Ceausescu, shout as he banged the table with true Khrushchev-like fervor.

Both leaders rose to lead their countries without ever having earned a single penny in any productive job. Neither man had the slightest idea about what makes an economy work. And each sincerely believed that stealing from the rich was the magic wand that would cure all his country’s economic ills. Their vaunted “historical duty” was rooted in Marx’s Manifesto of the Communist Party, which urged its followers to “eradicate capitalism” by progressive income taxes and abolition of all rights of inheritance.

Last September, I could hardly believe my eyes. The president of the United States asked the extraordinary joint session of the U.S. Congress to impose an additional super-tax on “rich people.” In other words, to make “stealing from capitalists” an official policy of the United States, whose Declaration of Independence emphatically states that “all men are created equal.”

James Madison, author of the U.S. Constitution, must have turned over in his grave. He once wrote:

I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.

Samuel Adams, one of the founding fathers of the United States, also clearly stated:

The utopian schemes of leveling [i.e., redistribution of wealth] … are arbitrary, despotic, and, in our government, unconstitutional.

That memorable day of September 8, 2011, when the U.S. president tried to legalize “stealing from capitalists,” marked the 835th day that the Democrat-controlled Senate had failed to pass a U.S. budget. Even a mom-and-pop grocery store has to have a budget to keep its business running. Stealing can hardly be budgeted, however.

The economic collapse of the Soviet Union dramatically proved that stealing does not pay, even if it is committed by the government of a superpower. The Democratic Party’s reliance on redistributing America’s wealth instead of encouraging the production of wealth generated economic collapse as well. The GDP fell from 4.5% to 1.3%.

In my experience, the redistribution of wealth has always been presented as needed to help the poor, but it has usually been used by politicians to buy the votes they need to transform their electoral district or even their country into monuments to themselves.

Lenin pretended that Russia was poor because its wealth was monopolized by its privileged class, and he was able to gather millions behind his flag by promising to redistribute the country’s wealth. Stealing became, indeed, a national policy on the day the Soviet Union was born. After the 1917 revolution, Lenin confiscated the imperial family’s wealth, seized the land owned by the rich Russians, and nationalized Russian industry, banking, and agriculture. By forcing the peasants into collective farms, the Kremlin stole their land, their animals, and their agricultural tools. Within a few years, the entire Soviet economy was running on stolen property managed by bureaucrats who had no clue about how to make their new country work. Some 10 million people died of starvation.

In the mid-1930s, the Communist Party itself became a target for theft. Following a brief period of collective leadership exercised by the Politburo, Stalin stole all the top-level positions in the country and pinned them onto his own chest like war decorations, thereby establishing a dismal new feudalism in the middle of the 20th century. That was exactly what later occurred in Eastern Europe after the Communists took over. When I left Romania, the list of the positions and titles accumulated by Ceausescu and his wife could have easily filled a small booklet.

Once settled in the saddle, Stalin began using the wealth stolen from the people to glorify himself and his political father. The city of Tsaritsyn was grandiosely rebuilt as Stalingrad, just as St. Petersburg was aggrandized as Leningrad to glorify Lenin. The embalmed body of Russia’s newest saint, Lenin, was put on display as a holy relic for adoration by the people in an imperial mausoleum.

In the mid 1930s, the statues and the portraits of Stalin began growing like mushrooms all over Russia, which became a monument to him personally. That was exactly what later occurred in Eastern Europe after the Communists took over. As one might expect in the Balkans, Ceausescu’s cult took on a gloriously Byzantine coloration. Almost every Romanian town acquired its Ceausescu boulevard, Ceausescu plaza, Ceausescu square, and before long the country’s industrial and agricultural organizations acquired similar names. “A man like me is born only once every five hundred years,” my former boss proclaimed over and over.

People everywhere love free lunches, and American politicians also began using the redistribution of wealth to promote themselves. Lyndon Johnson’s “Great Society,” built with America’s tax money, had the secret purpose of stitching together a pro-Democratic voting coalition needed to keep him in power. It accomplished its goal, but it shifted the U.S. budget into the red.

Lyndon Johnson opened a new American era, in which stealing tax money to build monuments to yourself has become a legal policy.

Over his long career in the U.S. Congress, the late Democratic Senator Robert Byrd was able to steal $3.3 billion, with a “b,” of tax money in order to build his West Virginia into a monument to himself. Several transportation projects named after him gained national notoriety. The Robert C. Byrd Highway, also known as the Appalachian Development Highway System, was dubbed “West Virginia’s road to nowhere” in 2009, after it received a $9.5 million earmark in the $410 billion Omnibus Appropriation Act and $21 million more from the American Recovery and Reinvestment Act of 2009. More than 50 buildings erected with tax money stolen by Senator Byrd are now named for him. Here are a few: Robert C. Byrd Community Center, Pine Grove, WV; Robert C. Byrd Federal Correction Institution, Hazelton, WV; Robert C. Byrd Visitor Center, Harpers Ferry National Historical Park, WV; Robert C. Byrd United States R Courthouse and Federal Building, Charleston, WV; Robert C. Byrd Academic and Technology Center, Marshall University in Huntington, WV; Robert C. Byrd Auditorium, National Conservation Center, WV; Robert C. Byrd Green Bank Telescope, Green Bank, WV; Robert C. Byrd Library, Wheeling, WV.

Now it’s our turn

Old Pictures: A Cuban Exile Story

Thanksgiving Day among America’s most thankful

By Mario Layola

Every Cuban-American family has the following black-and-white picture hanging somewhere on a wall: Grandfather and his many brothers, dressed in smart suits with thin ties; wives and sisters in floral and pastel dresses; everyone crowded together, some kneeling, others standing, all beaming broadly. That was Cuba in the 1950s. That was the country that Fidel Castro ruined.

For those of us in my generation – the first to be born in the United States – the memory of our families’ exile begins with that old black-and-white picture. It is the backdrop to the family history we were raised on, which all Cuban exile families share, stories of upheaval, loss, and salvation.

The challenges of exile kept our families close together, long after they settled here. In theMiami house I grew up in, my grandparents lived in the third bedroom. Many of my grandmother’s sayings still ring in my ears: Ay chico, si el diablo sabe más por viejo que por diablo (“The devil knows more because he’s old than because he’s the devil”). Our grandparents and parents spoke Spanish to us growing up but, almost as soon as I learned to read, my mother surrounded me with books in English. We were expected to excel in school.

One thing that keeps the Cuban-exile community close is the intimate knowledge of how depraved Castro really was. Our families felt lucky to find so many Americans opposed to Communism in principle, but most of those Americans had little notion of Fidel’s taste for cruelty. Ask Huber Matos, formerly Fidel’s comandante for Camagüey province, who early on in the revolution dared to write a letter urging Fidel to hold elections as promised. He was summarily convicted of treason and sedition and sentenced to 20 years in prison. The best part was Fidel’s personal touch: He specifically ordered Matos’s best friend to arrest him.

Virtually all our families supported Castro at first. They wanted an end to the dictatorship of Fulgencio Batista and a return to democracy. They believed Castro’s rhetoric of democracy and liberty and had little reason to believe he intended anything else.

My family fled Cuba in May 1961, in the midst of a massive exodus. Castro had been in power barely two years, and he had already canceled elections; forced non-Communists to resign from the government in disgrace; worked out secret arms deals with the Soviets; carried out mass summary executions live on television; shut down the free press; attacked the Church and confiscated its property; summarily detained and tortured critics; criminalized private commercial transactions; and blanketed all of Cuba with the enduring terror of his dictatorship.

If Communism was in conflict with human nature, it was particularly in conflict with the nature of Cubans. With no incentive for people to get ahead, commercial activity nosedived. According to Soviet archives, Cubans habitually falsified records to exaggerate production and hide theft. The planned economy fell apart from the very start. It was one of history’s most vertiginous peacetime impoverishments of an affluent society.

Today, Cuba continues its lonely journey through the infinite calamities of Castro’s dictatorship.In recent years, the state has announced such blockbuster democratic reforms as letting people buy toasters and letting barbers keep part of what they charge. More significant market reforms are withdrawn as unexpectedly as they are announced. Dissidents are still routinely detained and beaten. Disgustingly, the victims of these beatings include young women, such as the blogger Yoani Sánchez, and elderly women, such as Laura Pollán, former leader of the group Ladies in White, who recently died in a state hospital after years of intimidation and physical abuse by government-organized mobs. In the last year, many political prisoners have been released from prison, in shockingly poor health, and immediately exiled to Spain. So much for the hope that Raúl Castro would liberalize anything.

Meanwhile, if Cubans turned out to be terrible Communists, they have made great Americans. The young kid who swept the floor of the local Burger King in the 1960s rose to become VP of operations. The one who started at Kellogg’s as a sales rep rose to become CEO and U.S. secretary of commerce. The Cuban-American community now has a median income slightly higher than that of America as a whole.

For our families, America has been a dream of loss redeemed; of sacrifice repaid; and ofhumiliations undone. The humble dignity with which our parents and grandparents lived out their lives in exile was one inspiration to my generation. Another was their gratitude to America. And yet another was their staunch conservatism in defense of the principles that made America great: freedom, limited government, and self-reliance.

For Cuban-exile families, the American dream continues to play out against that old black-and-white family picture. But those in my generation are the protagonists now. It has fallen to us to build in this country something that can make up for what our families lost in theirs.

We grew up being told that everything is possible in America. Now it’s our turn to prove that it’s true, and to make sure it stays true. That’s why so many of us feel called to public service. America has given us – and our families – as much to be grateful for as anyone in America.

The greatness of this country needs defending in every generation. Now it’s our turn.

Common Sense

Milton Friedman Responds To OWS Protestors

During his lifetime, Milton Friedman was a tireless advocate of individual liberty and the free market. Dr. Friedman's passionate defense of freedom and markets was a powerful and timeless message that would be just as relevant today if Milton Friedman were alive to address the concerns of the OWS protestors about wealth, inequality, and the poor, as when Friedman delivered these lectures more than 30 years ago:

The killing of a Libyan Disctator

Dictatorship: The Wave of the Future?

by Theodore Dalrymple 

No one ever deserved a grisly death more than the late Colonel Muammar Gaddafi, but this is only a proof – if such a proof were needed - that justice is far from the only human desideratum. Gaddafi was responsible for untold misery, its amount limited only by the relative insignificance and impotence of the country in which he seized power; but when I first saw the photograph of him taken, lying bloodied but conscious, by a French photographer (a photograph that is surely destined for such immortality as the world can confer), I felt for him what I did not think I could ever feel for him – compassion. The fact is that no one should die as he died, or be killed as he was killed.

Other dictators have met grisly ends, of course. Mussolini was strung up, Ceausescu shot and Saddam Hussein hanged, all unceremoniously and without dignity. It is possible, even, that Gaddafi’s death was not absolutely the worst suffered by a tyrant in the last hundred years. President Guillaume Sam was dragged out of the French Embassy in Port-au-Prince, in which he had taken refuge, by an enraged mob, impaled on railings, cut into pieces and his parts exhibited in the city. President Sam was no guardian angel of the rule of law: he had just had 169 political prisoners summarily executed, but this should not prevent us from accepting as a basic moral principle that impaling and cutting up people is wrong.

The President of Liberia, Samuel Kanyon Doe, was captured by the militia of the self-styled Brigadier-General Field Marshal Prince Yormie Johnson, who had him trussed up naked like a chicken and his ears cut off, his death by blood loss recorded on a video that became for a time Liberia’s greatest cultural export. Doe also was no pacifist: I visited the church in Monrovia, St Peter’s, in which he is alleged, during the last days of his presidency, to have taken part personally in the mass murder of six hundred people who had taken refuge there. The dried blood, with the silhouettes of the bodies of the massacred, was still on the floor of the church and the mounds of the graves still raw in the churchyard. Even if he did not take part personally in the massacre, he knew of it and approved it.

Nevertheless, when I saw the video of him being tortured to death (not retribution for his wickedness but the numbers of his bank accounts was the object in view), I felt what I had fondly but no doubt mistakenly thought was natural human sympathy for him. Appalling as he undoubtedly was, his screams of agony were not such as should be deliberately extorted from any man; and what was almost as horrible, and ultimately more chilling, was the calm self-righteousness of the man who ordered the brutality. Nothing dissolves salutary moral barriers more completely than sadism in the name of an alleged higher purpose. (Johnson supposedly sought the bank account numbers to recover the money for the people of Liberia, not for himself.)

Of course, some might say that such feelings are easy enough to indulge in for someone who has not lived under any of these dictators. To have existed for forty years, or your entire life, under someone like Gaddafi might be more than enough to overwhelm you inhibitions against vengeful cruelty. Passion has, if not its rights exactly, at least its excuses; and when I recall how misled I had been into thinking, after having spent only two weeks in Romania under the Ceausescus, that it was right that they were summarily shot, a certain reticence on my part in condemning the passions of others is in order. Of course, the Romanian revolution was more of a palace coup than it at first appeared; but in any case, the charges against the Ceausescus, such as genocide, were ridiculous and trumped up, despicable as the pair may have been. No one should be shot like stray dogs in a courtyard, as they were shot; and I became ashamed of my initial enthusiasm for their demise.

But what is the correct way to deal with fallen dictators? This is a delicate question. To put them on trial has its inconveniences and dangers, since one of the qualifications for the post of tyrant is a long and detailed memory; and since no tyranny is ever so personal that the tyrant does not need accomplices, usually many of them, if his trial is not of the merely kangaroo variety a la Ceausescu, it is clear that the ex-tyrant in the dock can spill the beans about a lot of people, many of whom will have benefited from his overthrow or even have been the leaders of it. Those about whom the beans have been thus spilt will in turn be able to spill beans, until the whole society is torn apart by an orgy of accusation and counter-accusation. Much better, then, say some, just to execute the fallen tyrant, pretend that he had acted entirely alone, and repress memories until they fade in any case.

When Gaddafi was maltreated to death by a crowd, it was said that, no matter how revolting the scene, it was a good lesson to other dictators, most notably Assad of Syria. But the lessons that people draw from events are not like the ineluctable conclusions of a syllogism; the conclusion that Assad should flee his country does not follow from the fact that the longer he stays the worse his eventual fate. Lessons in human conduct are usually ambiguous. Assad might just as well have learned from Gaddafi’s horrible fate that it is best to go down fighting, and if necessary take whole populations down with him, as that he should take the next flight to Estoril (the Portuguese resort where deposed crowned heads used to live out their enforced retirement, and potter the rest of their lives away). After all, flight does not ensure the safety of ex-dictators: Maximiliano Hernandez Martinez, the ex-strongman of El Salvador, who believed he could train his eyes to stare at the sun and that it was worse to kill an ant than a man because an ant had an eternal soul, was stabbed to death by his chauffeur years after his downfall and exile in Honduras. Anastasio Somoza was blown up in his car in Paraguay after his movements had been watched for six months. Not many dictators find a refuge as completely safe and well-guarded as Mengistu of Ethiopia has found in Mugabe’s Zimbabwe. Uneasy, then, sleeps the head that has once exercised dictatorial power.

When General Pinochet was arrested in London (he had not realised that Albion, always perfidious, was now perfidious even though not in its own interests?), was he being punished for having been a brutal dictator, or for having peacefully relinquished power? From the point of view of the average Guardian-reading person, obviously the former; but from the point of view of the average dictator, the latter. Fidel Castro’s class or professional solidarity with dictators overcame his political differences with the General; and it was surely somewhat ironical that Erich Honecker, the fallen leader of the German Democratic Republic, should have chosen Chile as his country of exile while Pinochet was still commander-in-chief of the army there. Dictators must stick together.

Fueling Boom and Bust

The Causes of Mass Unemployment

By Robert Murphy

The single most significant aspect of the business cycle—in both political and human terms—is the mass unemployment that occurs during the bust or recession phase. Yet ironically—and perversely—the very government policies that most people recommend to “help” the plight of the unemployed actually prolong the recession and sow the seeds for the next unsustainable boom.

The artificial prosperity of the boom period was fueled by the government’s interventions pushing down the interest rate. The “false” price of borrowing credit led entrepreneurs to borrow more than there was true savings available. Remember from Lesson 12 that the pure market interest rate serves to ration the available savings among all the competing borrowers, and that the process isn’t simply about money. There are real, physical resources involved as well. If workers and materials are devoted to building a new car factory that will take two years to complete, then those resources are “locked up” in the project for at least two years until they begin to “bear fruit” in the form of new cars.

During the artificial boom, too many of these long-term projects are started, because the false interest rate is too permissive. But the mere printing up of new money hasn’t actually created more workers or other resources to go around. It’s still the case that if work begins on a new car factory, it absorbs resources that could have been used elsewhere. If, during the early stages of the boom, too many projects are started, then it is physically impossiblefor them all to reach completion. The sooner the central bank chickens out and lets interest rates return to their appropriate level, the better, because then the entrepreneurs catch their mistakes sooner and stop digging themselves deeper into their mistaken projects.

When the boom collapses and turns into a bust, there is a period of confusion where everyone in the market needs to reevaluate his or her situation, in light of the shocking realization that the plans made during the boom were mistaken—and in some cases, very badly mistaken. If we step back and think about the adjustment process, during which the economy returns to a sustainable growth path, it must go something like this: Those resources that were drawn into unprofitable projects or sectors during the boom period, now need to be redirectedelsewhere. And that requirement includes labor resources, meaning that people who happen to be working at extremely unprofitable businesses (but which seemed profitable during the boom) need to lose their jobs once the bust occurs.

For example, if six months’ work has been done on a new car factory that will take another 18 months to complete, but for which (in light of the new information) there won’t be enough car buyers to support its operations, then obviously the correct thing to do is to stop building it immediately. From the point of view of the whole economy, it’s not “compassionate” for the government to, say, use tax dollars to subsidize the company that owns the factory, in order to prevent the construction workers from being laid off, and to “create” jobs in the factory making cars that no one wants to buy No, the correct thing to do is allow those workers and other resources (which can be salvaged) to flow into other projects or sectors that are actually profitable.

The problem with this “tough love” recommendation, of course, is that it takes time for the economy to rebalance itself after an artificial boom, especially if the boom has lasted years. Consequently, there could be a period of months or even longer for some of the displaced workers, where they can’t find a productive niche in the streamlined economy, in the wake of the bust. Rather than waiting for the “laissez-faire medicine” to work, many people would far prefer the government to step in and provide immediate relief.

Yet even here, it’s important to realize the actual function that a prolonged spell of large-scale unemployment serves. Remember the critical flaw with outright central planning, i.e., pure socialism: Without market prices and the profit-and-loss test, the central planner wouldn’t know how to make efficient use of the resources at his disposal. In the modern United States, for example, a would-be central planner would have no idea how many people “should” be brain surgeons, or construction workers, or school teachers, and let alone how many people within each of these broad totals should live in each particular city in the United States.

By the very same token, then, no person or even group of experts could possibly know the “right” way for the economy to adjust, in light of a collapsing boom. For example, consider the construction workers who built houses in Las Vegas during the great housing boom from the early 2000s through 2006. Clearly there were too many workers (and other resources such as lumber and nails) going into the Las Vegas housing industry during these years, and the “correct” thing to do would be for them to do something else with their labor time.

But what, specifically? Each construction worker in the Las Vegas area was a unique individual, with different skills, interests, and personal circumstances. The “correct” response of one worker may have been to get on a bus to Texas to take a job at an oil refinery. The correct response of another may have been to go back to graduate school and finish his Ph.D. in literature. And perhaps the correct response of a third worker would have been to take a huge pay cut flipping burgers in Vegas, waiting for the housing market to recover, because his wife held a great job as a personal assistant to a successful Vegas attorney.

Now that we have some idea of the scope of the problem, we see that the pure market economy is the best way to solve it. After the boom collapses, many workers realize that they can’t earn the same paychecks they had become accustomed to. That’s what it means to say the prosperity of the boom years was illusory—people really weren’t as rich as they thought. What happens then is that laid off workers begin looking for work, hoping to find a new job that offers a salary and other features comparable to their old job, and which doesn’t require them to move or (at least) to move to an area they detest.

It takes time for people to search for new positions. The longer an unemployed person searches, the better his new job is likely to be. However, the drawback of longer searches is that the unemployed person isn’t contributing anything directly to the economic system; he must live off of the output of others during his search.

Notice that all of these issues are given their due weight in the pure market economy. Each displaced worker is allowed the freedom to choose his or her new job, based on all the factors relevant to the individual; no government official decides where the worker “ought to go now.” At the same time, individuals bear the brunt of their delay in finding new work, because there are no government unemployment programs that (to put it bluntly) pay people not to find a new job.

As we have stressed throughout this book, economic analysis per se cannot decide which government policies are good and which are bad. But it can shed light on the results of particular policies, so that citizens and government officials can make informed decisions. In the case of mass unemployment, the issue is not simply a matter of cruelty versus compassion. By establishing a system of unemployment compensation, for example, the government reduces the earnings of employed workers, and makes it less attractive for profitable businesses to expand at the onset of the recession.

The government doesn’t create resources or wealth, it simply redistributes them. If there were no formal government scheme for unemployment insurance, individuals and businesses would still have the option of using their larger paychecks and profits (which would no longer be subject to contributions to the unemployment fund) to build up their savings in order to provide a cushion during times of economic hardship. Perhaps this free market cushion would in practice be smaller than the duration of unemployment checks established by the government, but again, what economics shows us is that there is a tradeoff involved. It is not a fact of engineering or chemistry to say how long unemployment relief should last; that is clearly an economic question.

For example, it would clearly be wasteful if the government established a rule saying that anyone laid off from his job could collect checks equal to 95% of his former salary, for up to 20 years, until he finds a new job. Even the most zealous advocates for the unemployed would admit that that hypothetical policy would be disastrous, and would in fact hurt workers (all things considered). But once we admit that there can be such a thing as unemployment benefits that are too “generous,” our knowledge of basic economics makes it hard to justify the government’s decision to provide benefits in excess of what would have occurred in a voluntary pure-market economy.

Finally, if the government were really interested in helping the unemployed, it would stop using the central bank to artificially suppress interest rates. If the government and public could resist the urge to meddle during a recession, and simply let the correct market prices redirect workers and resources to sustainable niches, there would be no need for further dislocations. Unfortunately, in practice the central bank often “cures” a recession simply by fueling the upswing of another unsustainable boom.

The Life and Death of Hirudo medicinalis

Debts and Taxes

By Stephen Davies

States and polities—or rather the ruling classes that control them—face two great tests in the course of history. Failure to meet them typically leads to disaster and even the dissolution of the State. The first and most familiar is war, armed conflict with other States (or more accurately, other ruling groups). By analogy wars can be compared to examinations or timed tests; the test of war is relatively short, intense, and often sudden in onset, with the probable result obvious from the start and often dramatic.

The second kind of existential test can be likened rather to that of researching and writing a dissertation—longer, more drawn out, with less immediate drama but presenting in many ways a more thorough and searching examination. The consequences of failure, however, can often be just as severe, even if they take longer to arrive. This second test is that of managing taxation and public finance. As writers through the ages have recognized, failure at this can ruin a polity as surely as defeat in war.

What, though, is the nature of the test, and in what sense do ruling groups fail it? Historically, ruling groups draw incomes (“rents” in the economists’ language) from the groups they control. They do this through various means, including taxes, fines, fees, tariffs, tolls, the selling of privileges and exemptions, and even outright expropriation. In return they typically provide services, most notably defense against irregular predators, a means of settling disputes, and a range of what are commonly described as “public goods,” which can cover anything from public works and infrastructure to education. Ultimately all these services have to be funded out of the revenues the rulers can gain. It is true that a shortfall can be met by borrowing, but the money lent is secured against future income and so doing this is simply a way of spending income now in anticipation of its arrival in the future.

The failure of rulers to handle this can take two forms. The simplest is when the level of taxation and other exactions is simply too high and discourages productive labor to such a degree that wealth is destroyed rather than created. If taken too far, this can actually destroy the basis for the rulers’ position. Just as a parasite that kills its host is a biological failure, so ruling classes that destroy their own productive base are clearly political failures. The more insidious failure, however, arrives when ruling groups spend more money than they take in and fund it through debt. This can go on for a long time, even indefinitely, provided the underlying economy is productive and dynamic enough and the spending is not too high. The evidence of history is that it cannot go on forever. Sooner or later a crunch will come, and the way the ruling group responds determines whether it passes or fails the test.

In 1783 the Treaty to Paris brought an end to a worldwide conflict. For Americans this was the American Revolution, when the colonies gained their independence from the British Empire. From a world perspective, however, this was only the latest round in a struggle for global leadership between Britain and France that could be traced back to the 1690s. Just as in previous episodes, the war had been financed mainly through the issuing of debt, which was added to the accumulated obligations of earlier conflicts. By 1783 the public finances of both France and Britain were in a desperate state. In many ways the British finances were in worse shape than those of the French: In 1784 total British debt amounted to 156 percent of GDP, comparable to French levels but with an economy not as large as that of France and so less able to support such a burden. However, the next six years saw the British elite address this problem. Their French counterparts did not and failed the test.

Diverging Paths

In Britain the new prime minister, William Pitt the Younger, brought the public finances under control through what was known as “economical reform.” This was a combination of extensive tax increases and major cuts in government spending, most significantly through the abolition of a large number of useless government jobs or sinecures. This had significant political implications because access to these posts was a major form of patronage and central to the political system of the time. Even so, the cuts were made.

In France the new minister of finance, Charles Alexandre de Calonne, did not address the state of the French public finances in the same way, at least not initially. Instead he floated a series of loans to bridge the gap between income and expenditure. Despite its greater wealth, the French crown had to pay twice the interest rate of the British State, because its creditors (the so-called “financiers”) had less confidence in its capacity to repay the debt and its willingness and ability to do what was necessary. Eventually Calonne proposed a series of reforms including tax increases (in particular taxes on the aristocracy and clergy), major cuts in government spending, and a move to internal free trade in France. To overcome opposition, in 1787 he persuaded the king to summon an Assembly of Notables. However, the elites opposed both the tax increases and spending cuts, and he was dismissed. The publicizing of the desperate state of the finances and the accelerating loss of confidence in France’s rulers by their creditors meant the difficulties of the crown became even more acute until, in 1789, the king in desperation called a meeting of the Estates General for the first time in over 150 years to try to break the deadlock. What followed is, as they say, history.

Contemporary America

Contemporary Americans should look back at these events with increasing nervousness. As in Britain and France in 1783, the public finances are in a parlous state. The gap between revenue and expenditure has never been wider and is even worse than the headline figures suggest when the unfunded liabilities of Medicare and Social Security are taken into account. For a long time now the American political class has been funding expenditure through borrowing, depending ultimately on the confidence of their creditors and the underlying productivity of the American people. If this confidence should waver (and there are many signs of this) the cost of this borrowing is bound to rise. If the spending and liabilities exceed the capacity of even the most heroic future productive labor by American citizens (as they clearly do) then something has to give.

Ultimately it is clear that either spending must be cut or taxes and imposts increased or some combination of the two. Just as in France, however, this depends on the willingness of both elites and ordinary people to do what is necessary. That in turn depends on a broad agreement as to the proper role and size of government. In the absence of such an agreement, just as in France in 1787, tough decisions will be ducked and matters will go from bad to worse. Arguments about taxes and the deficit are thus proxies for a deeper debate.

Surprised ?

CBO: Stimulus hurts economy in the long run

By Stephen Dinan

The Congressional Budget Office on Tuesday downgraded its estimate of the benefits of President Obama’s 2009 stimulus package, saying it may have sustained as few as 700,000 jobs at its peak last year and that over the long run it will actually be a net drag on the economy.

CBO said that while the Recovery Act boosted the economy in the short run, the extra debt that the stimulus piled up “crowds out” private investment and “will reduce output slightly in the long run — by between 0 and 0.2 percent after 2016.”

The analysis confirms what CBO predicted before the stimulus passed in February 2009, though the top-end decline of two-tenths of a percent is actually deeper than the agency predicted back then.

All told, the stimulus did boost jobs and the economy in the short run, according to CBO’s models. At the peak of spending from July through September 2010, it sustained anywhere from 700,000 to 3.6 million, which lowered the unemployment rate by between four-tenths of a percent to 2 percent.

The Obama administration had promised 3.5 million jobs would be produced at the peak of spending.

For this current quarter CBO said the stimulus is sustaining between 600,000 and 1.8 million jobs, which has improved the unemployment rate by as much as 1 percent versus what it otherwise would have been.

The White House did not return a message seeking comment Tuesday afternoon, but officials there previously have said the Recovery Act stopped the economy from falling into another Great Depression.

“The point is, what is uncontestable is that those infrastructure projects that were funded by the Recovery Act were very well managed, came in on budget or under budget and led to the creation of many, many jobs by an outside, independent analyst” White House press secretary Jay Carney said in September, as Mr. Obama was proposing another round of stimulus spending.

That new proposal called for $447 billion in expanded tax breaks, additional aid to states to hire teachers and emergency workers, and more infrastructure spending.

That broad effort has stalled, though on Monday Mr. Obama signed a slim portion of the package that offers tax breaks to businesses that hire veterans, and that repeals a 3 percent contract withholding requirement for government contractors.

On Tuesday, top House Democratic leaders sent a letter to House Speaker John A. Boehner urging support for the extension of unemployment benefits, last year’s payroll tax cut and higher payments to doctors who treat Medicare patients before they all expire at the end of this year.

“Independent economists from across the political spectrum estimate that failure to pass these essential pieces of legislation could reduce economic growth by much as 2 percentage points next year,” the leaders, including top House Democrat Rep. Nancy Pelosi and her two chief lieutenants, said.

CBO has re-evaluated the stimulus every three months, and its estimates for the total cost have varied. Initially the package was pegged at $787 billion, rose as high as $862 billion at one point, and is now projected to be $825 billion once all the money is paid out.

The nonpartisan agency also has changed its model for the spending’s impact on the economy, and the new calculations show the Recovery Act did less than originally projected.

CBO said it has concluded there is less of an indirect multiplier effect of federal spending.

Those changes caused it to drop its estimates for total employment sustained by the spending in 2011 from between 1.2 million and 3.7 million down to between 600,000 and 3.6 million.

As for the long-term situation, CBO said its basic assumption is that each dollar of additional federal debt crowds out about a third of a dollar’s worth of private domestic capital.

CBO said there is no crowding out in the short term, which is why the Recovery Act boosts the economy in the near term.

The entitlement mentality

Why the Titanic Is Sinking

 The real cause of America’s fiscal crisis and how to fix it.

By James L. Payne

Washington is now deep into the process of attempting to deal with the budget deficit, an exercise that leaves experienced observers with a sinking feeling. Presenting plans to cut spending and balance the budget is like the proverbial activity of rearranging the deck chairs on the Titanic. It involves a lot of busyness but does not address the real problem.

After all, we’ve been enacting plans to control spending and balance the budget for generations. One of the first efforts was the 1974 Budget and Impoundment Control Act passed in the Nixon administration.  Then we had the Gramm-Rudman-Hollings Act, signed into law by President Reagan in 1985. A few years later, in 1994, feisty Republicans took over both houses of Congress and provoked a government shutdown in the crusade for fiscal responsibility.

The lesson of history, then, is that you can’t cut spending by trying to cut spending. It’s a hard point for budget makers to digest, because it seems to defy the rules of arithmetic. Well, when it comes to national budgeting, these rules don’t apply. What matters are the rules of political perception.

Most Americans perceive that government is an effective provider of valuable services. They see it as a super store that supplies education, medical care, retirement income, housing, assistance to the needy, safe drugs, safe foods, scientific research, and so forth. That’s why spending cuts can never be more than temporarily effective. As soon as the specifics of the cutting become apparent, the public will be reminded how very much it likes government programs. As people learn about the autistic child who will be left unassisted, the hospital that will close, and the food inspectors who will be laid off,  the public clamors to fund these functions, and the campaign to cut spending falters. We’ve been through this cycle many times.

The lesson is clear: The real cause of red ink is the widespread belief that government programs are effective responses to national needs.  If you don’t counter this belief, you can never really cut government spending.

Faith in Government

Where does this confidence in government come from?  One possible answer is that it is based on reality and that we have numerous careful, unbiased, scientific studies that prove government is a cost-effective provider of services.

There are several difficulties with this position. The first problem is there are no such studies. There are studies that purport to evaluate government programs, but they never include all the overhead costs. By my count, there are 14 overhead costs in the typical government transfer program, seven involving taxation and seven involving disbursement. Such cost-benefit studies as have been done include, at best, only three or four of these costs. The reason why evaluations of government action are shallow and incomplete is the bias of the researchers. Before they attempt their study they already believe government action is beneficial. In other words, the cart—the belief that government is effective—comes before the horse—the evidence that it is.

Historically, too, confidence in government has preceded the evidence that might justify such confidence. The modern faith in government as a problem-solving machine emerged in the late nineteenth century, decades before any interventionist policies had been attempted. For example, in 1888 Edward Bellamy published a hugely successful utopian novella, Looking Backward, which posited a federal government in charge of everything, and solving all problems of poverty, unemployment, old-age assistance, and so on. Bellamy and the thousands who formed “Bellamy Clubs” all around the nation had no way of knowing if government programs in these spheres would be cost-effective solutions. They took it on faith.

The belief in government efficacy is not empirically based. It is the product of illusions. When they first notice government, children tend to see it as a super-parent, an authority figure that has many virtues — including great wealth, foresight, objectivity, and maturity — and is without ugly vices such as selfishness, irresponsibility, callousness, and a tendency to violence. This benign impression forms the basis of the popular view of government. Over time, as the result of actual experience with government, people begin to overcome this naïve faith, but in most cases they do not move far beyond the child’s view. They continue to see government as a machine that can fix everything — if only the right people are put in charge. Telling a public with this naïve confidence that spending should be cut is like trying to tell a child that a birthday cake should not be eaten: It has no understanding of, or sympathy for, the recommendation.

Toward a Solution

To restrain spending, therefore, one needs techniques that counteract the mistaken, illusion-based view of government. These measures will not resemble traditional spending reforms. They will not be laws that address the amount of spending. Instead, they will address the perceptions underlying spending, since once those attitudes are corrected, the pressure for spending will abate. To illustrate this approach, consider the simple idea of reminding people where government money comes from.

One misunderstanding that gives the public a false view of government is the philanthropic illusion. This is the idea that government has money, that it is like a wealthy philanthropist with extra cash to give to needy people and worthy causes. In fact government has no money of its own. The money that it spends has to be first taken away from taxpayers, and if you do the arithmetic carefully, tracing out all the indirect and shifted burdens of taxation, you will discover that everyoneis a taxpayer. Therefore, to get money for its spending programs, government inflicts privation on everyone, including low-wage workers, college students, the homeless, and so on, and it drains resources from vital activities like technological innovation, medical care, job creation, and so forth.

Declaration of Gratitude

Under the spell of the philanthropic illusion, politicians and the public downplay or forget the harm and injury of taxation. A simple device that will help counteract this myopia is the “Declaration of Gratitude.” Everyone who receives government money would be required to sign this statement:

I realize that the funds I am about to receive come from the nation’s taxpayers, and I am grateful for the sacrifices they are making on my behalf.

Its administration is simple. When you fill out the paperwork for any government grant, subsidy, or payment, you also must sign the statement, whatever the benefit: food stamps, cotton subsidy, small business loan, government paycheck, research grant.

In monetary terms, signing this statement doesn’t change anything: Everyone gets whatever government dollars he was going to get. No one can be accused of starving grandma. What it does do is change the psychological climate. It destroys the assumption that government spending harms no one. This frank reality is covered up today. Take the Earned Income Tax Credit. This is a $50 billion welfare program, yet the people receiving this benefit call it a “tax refund” when they get their check. Most of them have no idea that this is a subsidy paid for by taxpayers. Well, if they had to sign the Declaration of Gratitude, they would know.

There is likely to be a lot of resistance to the Declaration of Gratitude idea. Most Americans seem to feel themselves “entitled” to whatever government funds they get, and are loathe to recognize their dependent status. This entitlement mentality produces the bizarre contradiction of a country with a national debt of $15,000,000,000,000 whose citizens believe they are paying their own way.

But resistance or no, reforms that change the perceptual climate are essential for national economic health.  Sound fiscal policy will not be achieved until the public attains a disillusioned view of government.

Quote of the Day

Trade and Merchandilism

 

"Trade is in its nature free, finds its own channel and best directeth its own course; and all laws to give it rules and directions, and to limit and circumscribe it, may serve the particular ends of private men, but are seldom advantageous to the public."

Charles Davenant‘s 1697 

from “An essay on the East-India trade”