The inevitable reckoning will be nasty, brutish and not short

Europe's Entitlement Reckoning

From Greece to Italy to France, the welfare state is in crisis.

WSJ Editorial

In the European economic crisis, all roads lead through Rome. The markets have raised the price of financing Italy's mammoth debt to new highs, and on Tuesday Silvio Berlusconi became the second euro-zone prime minister, after Greece's George Papandreou, to resign this week. His departure may keep the world's eighth largest economy solvent for the time being, but it hardly addresses the root of the problem.

In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived.

If the first step in curing an addiction is to acknowledge it, there is little sign of that in Europe. The solutions on offer are to spend still more money, to have the Germans bail out everybody else, or to ditch the euro so bankrupt countries can again devalue their own currencies. France's latest debt solution includes raising corporate, capitals gains and sales taxes.

Yet Europe's problem isn't the euro. If it were, Hungary, Iceland and Latvia—none of which use the euro—would have been spared their painful days of reckoning. The same applies for Britain. Europe is in a debt spiral brought about by spendthrift, overweening and inefficient governments.

This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of "self-inflicted strangulation." Government debt is 120% of GDP, making Italy the world's third largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000.

An aging and shrinking population is a symptom, but not a leading cause, of the eurosclerosis. A fifth of Italy's 60 million people are 65 or older and make increasingly expensive claims on state-paid pensions and other benefits. In fast-growing Turkey, only 6.3% fit that demographic. Italian women have on average 1.2 children, putting the country's birth rate at 207th out of 221 countries.

But the bulk of the responsibility lies with politicians. Mr. Berlusconi, Italy's richest man, promised a shake up each time he ran for office (in 1994, 1996, 2001, 2006 and 2008). He was the longest serving premier in post-war Italy, from 2001 to 2006, controlled parliament and could have pushed through reforms. He didn't. Promises to lower taxes and hack away at regulations and protections for Italy's powerful guilds—from taxi drivers to pharmacists to journalists—were broken.

"It is not difficult to rule Italy," Benito Mussolini once said, "it is useless." The so-called concertazione, or concert, of Italian coalition politics that brings together numerous parties in the Parliament makes for unstable and indecisive governments. So does the fear prominent in many European countries that any serious reform will provoke street protests. An unhappy byproduct of a welfare state is that it creates powerful interests that will fight to the last to preserve their free lunch, no matter the cost to the country.

But now hard choices can no longer be postponed. And the solution to Europe's debt crisis must begin with reforming, if not dismantling, the welfare state. Europe rose from the economic grave in the 1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the 1980s-'90s, and it can grow again. A decade ago, Germany was called the "sick man of Europe," bedeviled by Italian-like economic problems. But a center-left coalition, supported by trade unions and German society, overhauled labor and welfare codes and set the stage for the current (if still modest) export-led revival in Germany.

The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America's federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short.

Keep calm and carry on

European Left and the Fall of the Euro

 

By Adam Shaw

There are many on the Euroskeptic right who can see a silver lining to a potential breakdown of the European Union as we now know it.  Such a view is understandable; having been dismissed as xenophobic, economically illiterate racists for daring to oppose the great socialist European project since the early 1990s, we have finally been proven right.  Certainly, we have been right for years, but now it is undeniable.

Europe is in continent-wide debt, the Euro currency is in its death throes, and the financial stability of all of Europe depends on...Greece.  Surely no one can deny that the European project as conceived by the socialist left is dead, and that we need to fundamentally rewrite the that project.  Right?

Wrong -- for it seems that the left aren't learning from their mistakes.  In Britain, the classic example of this is the leader of the Liberal Democrats -- and current deputy prime minister of the British Coalition government -- Nick Clegg.

The Liberal Democrats are the main pro-European force in British politics, and have been the strongest advocates for British entry into the Euro, as it was the only British political party united on the issue.  Luckily for the United Kingdom, they failed to get their way, and Britain has retained the pound sterling.

The Euro has been shown to be such a monumental failure that even Clegg -- a strong voice in the pro-Euro camp -- came out as this year's conference and declared that "with the benefit of hindsight, you can say it would have been a huge, huge error" for Britain to have entered the Euro.

This stunning admittance of error is equivalent to a right-wing party concluding that capitalism doesn't work, or a left-wing party acknowledging that the welfare state doesn't help poor families.  One would assume that this U-turn on the issue by a major left-wing party, as well as the obvious collapse of the European project as a whole, would lead to massive self-evaluation and a penitential spirit from left-wing journalists and politicians.

Yet, less than a few months later, those on the left in favor of a European superstate are running their mouths again at those who would dare continue to oppose their grand scheme.  Socialist business secretary Vince Cable stated at the same conference where Clegg backed down that the Euro currency could still be a success -- although he of course failed to outline how this could happen.

Additionally, left-wing commentators have failed to drop their tiresome refrain that Euroskeptics are nothing but racist weirdos who don't know what they are talking about, with The Guardian's correspondent Polly Toynbee decrying recent calls from British conservatives for a European referendum as luxuriating in "escapist Europhobia" while The Independent's Andrew Grice dismissed Euroskeptics as "dreamers" whose economic arguments are nothing more than reflexive euro-bashing.

Yet the most gobsmacking attacks on Euroskeptics comes from the same Nick Clegg who -- less than two months after admitting that he was entirely wrong on the biggest economic decision in modern British history -- now feels that he is just the man to lecture the people who were entirely right on the issue as to how he knows better.

As the Euroskeptics call for a retreat from the sinking ship of the EU that liberals like Clegg put Britain on, Clegg has responded by condescendingly lecturing the right on how important Europe is, arguing:

It is only by having a loud voice in a united Europe that we can promote the open economy that will deliver growth. Being shoved to the margins, or retreating there voluntarily, would be economic suicide: a surefire way to hurt British businesses and lose jobs.

This hectoring tone becomes more jarring when one realizes that it is the same argument that was used to put Britain knee-deep in the mess in the first place, and it was also used by Europhiles like Clegg to convince Britons to commit hara-kiri by submitting to the doomed Euro currency.  It was just as wrong then as it is now, and yet the argument is still being wheeled out by the ideologically blinkered left.

Nick Clegg is of note, as he is a textbook example of the European elite politicians who are currently making the key decisions for Europe's future.  Those Eurorealists who were hoping that the last few years would convince the continental elite that a new tactic was required are being too optimistic.

We have seen no sign that the enormous bailouts will cease -- except for the standard promises that no, really, this is the last bailout.  There have been no serious proposals for a restructuring of the Euro, or a re-evaluation of who should be part of the currency; and the idea that the politicians may be more open to installing more democracy in the European system was blown apart by the furious reaction to the mere suggestion of a Greek referendum on the issue.

Although a few austerity measures have been implemented in one or two select nations, there are no signs that these represent anything more than mere bookkeeping -- there is no ideological debate about the role and size of government here.

Those on the right who believe that it is impossible for the Europhiles to remain in denial any longer are mistaken.  The European delusion has been fighting on in spite of failure after failure for decades.  Every bump in the road, every obstacle is seen to be solvable by entering deeper into union and spending more money, and this is not about the change any time soon.

Until true conservatives get hold of power across Europe and dismantle the socialist EU themselves, the bailouts will continue, the size of government will increase, and the spending of other people's money by unelected bureaucrats will carry on as usual.  "Keep calm and carry on" was once a famous saying in wartime Britain -- it could now be the official motto of the European Union as it calmly carries on into self-destruction and economic oblivion.

People who bite the hand that feeds them usually lick the boot that kicks them

OWS: Plato Bets on Tyranny

By Ed Kaitz

It might be worth everyone's while in these troubled times to set aside an evening in order to carefully read Book VIII of Plato's Republic.  The dialogue is nothing less than chilling in its illustration of what happens in a popular government when corrupt politicians inflame the vices of undisciplined citizens in order to destroy the business class and establish a tyranny.

Here's a link to Book VIII.  Plato's objective is to show how highly self-disciplined regimes gradually devolve into more inferior and immoderate governments.  Socrates begins the discussion showing how Aristocracies (rule of the wisest) devolve into Timocracies (rule of the military) which then descend into Oligarchies (rule of the wealthy).  Oligarchies descend into Democracies (rule of the people) which in turn become Tyrannies.

Pay attention to the final section: how a Democracy becomes a Tyranny.  The process starts back when the rulers are Oligarchs.  A kind of Government/Business nexus (think Fannie Mae) figures out that certain undisciplined borrowers will be unable to pay back their loans.  The lenders acquire the property and recoup their losses with some kind of bailout.  Socrates says none of this crazy lending would have happened if the lenders had had to risk their own funds:

"For if it be enacted that voluntary contracts be as a general rule entered into at the proper risk of the contractor, people will be less shameless in their money-dealings in the city, and such ills as we have now described will be less common."

Democracy arises when those thrown out of their homes discover that the rich Oligarchs and their kids are soft and lazy.  They rebel and set up popular rule.  The people want freedom more than anything else, so they are highly sensitive to any kind of "master" including objective standards of behavior, merit, and manners.  Therefore, the people's desire for freedom makes anyone in a position of authority highly suspect. 

For example, politicians who urge self-restraint, thrift, and balanced-budgets are punished and cursed while those politicians who promise whatever the people want in "copious draughts" are rewarded.  Parents are afraid to discipline their kids, and teachers begin flattering their students (grade inflation, extra credit, etc.).  Authority figures are afraid to establish boundaries since this would violate the people's "freedom."  Even national boundaries are no longer respected: "resident aliens, and foreigners, are all perfectly equal."

Politicians find it prudent to play the underdog and join with the people in their condemnation of those whose success is a product of frugality and self-discipline.  Certain "wicked-wine bearers" promise the voters "the unmixed wine of liberty far beyond due measure" and begin attacking the business class.  Businessmen are in turn accused of plotting against the people.

A "special leader" arises who promises even more: cancelling all debts and redistributing the land.  The special leader "stirs up faction against the propertied class" but protects himself with a special bodyguard.   He starts unnecessary wars to divert attention, becomes unpopular, and then aligns himself more closely with foreigners.  To protect himself even further he takes away the people's weapons.  The special leader is now a Tyrant.

Plato's Republic is about 2,400 years old but Plato's profound observation of human nature still stands:  those who cannot master themselves will cry out for someone to master them.  Eric Hoffer offered a similar conclusion much more recently:

"People who bite the hand that feeds them usually lick the boot that kicks them."

Less is more

End Bonuses for Bankers

By NASSIM NICHOLAS TALEB

I HAVE a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses.

More than three years since the global financial crisis started, financial institutions are still blowing themselves up. The latest, MF Global, filed for bankruptcy protection last week after its chief executive, Jon S. Corzine, made risky investments in European bonds. So far, lenders and shareholders have been paying the price, not taxpayers. But it is only a matter of time before private risk-taking leads to another giant bailout like the ones the United States was forced to provide in 2008.

The promise of “no more bailouts,” enshrined in last year’s Wall Street reform law, is just that — a promise. The financiers (and their lawyers) will always stay one step ahead of the regulators. No one really knows what will happen the next time a giant bank goes bust because of its misunderstanding of risk.

Instead, it’s time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed should not get a bonus, ever. In fact, all pay at systemically important financial institutions — big banks, but also some insurance companies and even huge hedge funds — should be strictly regulated.

Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called “black swan” events. The meltdown in the United States subprime mortgage market, which set off the global financial crisis, is only the latest example of such disasters.

Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers.

The ancients were fully aware of this upside-without-downside asymmetry, and they built simple rules in response. Nearly 4,000 years ago, Hammurabi’s code specified this: “If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”

This was simply the best risk-management rule ever. The Babylonians understood that the builder will always know more about the risks than the client, and can hide fragilities and improve his profitability by cutting corners — in, say, the foundation. The builder can also fool the inspector; the person hiding risk has a large informational advantage over the one who has to find it.

Banning bonuses addresses the principal-agent problem in economics: the separation between an agent’s interests and those of the client, or principal, he is supposed to represent. The potency of my solution lies in the idea that people do not consciously wish to harm themselves; I feel much safer on a plane because the pilot, and not a drone, is at the controls. Similarly, cooks should taste their own cooking; engineers should stand under the bridges they have designed when the bridges are tested; the captain should be the last to leave the ship. The Romans even figured out how to deter cowardice that causes the death of others with the technique called decimation: If a legion lost a battle and there was suspicion of cowardice, 10 percent of the soldiers and commanders — usually chosen at random — were put to death.

No such pain faces bailed-out, bonus-taking bankers. The period from 2000 to 2008 saw a very large accumulation of hidden exposures in the financial system. And yet the year 2010 brought the largest bank compensation in history. It has become clear that merely “clawing back” past bonuses after the fact is not enough. Supervision, regulation and other forms of monitoring are necessary, but insufficient — consider that the Federal Reserve insisted, as late as 2007, that the rapidly escalating subprime mortgage crisis was likely to be “contained.”

What would banking look like if bonuses were eliminated? It would not be too different from what it was like when I was a bank intern in the 1980s, before the wave of deregulation that culminated in the 1999 repeal of the Glass-Steagall Act, the Depression-era law that had separated investment and commercial banking. Before then, bankers and lenders were boring “lifers.” Banking was bland and predictable; the chairman’s income was less than that of today’s junior trader. Investment banks, which paid bonuses and weren’t allowed to lend, were partnerships with skin in the game, not gamblers playing with other people’s money.

Hedge funds, which are loosely regulated, could take on some of the risks that banks would shed under my proposal. While we tend to hear about the successful ones, the great majority fail and their failures rarely make the front page. The principal-agent problem they have isn’t a problem for taxpayers: Typically their investors manage the governance of hedge funds by ensuring that the manager is hurt more than any of his investors in the event of a blowup.

I believe that “less is more” — simple heuristics are necessary for complex problems. So instead of thousands of pages of regulation, we should enforce a basic principle: Bonuses and bailouts should never mix.

A sure path to disaster

The Income Gap Obsession

By J. Tucker

The word “equality” is being rammed down our throats every day, with special focus on the so-called “income gap.” The presumption is that we should all denounce the gap, work to eliminate it and embrace perfect equality as an ideal.

It’s true that inequality is growing, but the focus on that alone is sheer folly. Equality applies to math equations. You could also use it to describe how the law should be impartial with respect to persons — the traditional use of the term “equality” in the classical liberal literature. But that’s it. Otherwise, an obsession with this topic is very dangerous for a free society.

That’s because the people who invoke equality have no intention of creating the conditions to make it easier for the poor and for middle-income earners to grow rich. Leveling upward is never the goal. Egalitarians want to flatten incomes at the top so that the rich no longer exist. This can’t help anyone but the envious, those who get a kick out of destroying, rather than creating.

As Shikha Dalmia writes, “Income inequality tells us zilch about the only thing that really matters: Are the lives of Americans, rich, poor and in between, getting better or worse?”

Try an experiment in your mind with a society of 10 people. Five people earn $50,000 and five earn $100,000. Let’s say we flatten out the top half so that everyone earns the same. Equality! But who benefits? Absolutely no one. Society as a whole is poorer, and that is to the detriment of everyone: less capital, less wealth available for wealth-forming projects, demoralization among the smartest and most inspired and a ceiling on those who might have previously desired to move from the lower half to the upper half.

In any case, the supposed egalitarian ideal can always be achieved by driving everyone into the dirt and universalizing poverty. There is a serious problem, with an ideal that can be achieved by wrecking the lives of absolutely everyone.

In a free society, we just have to get used to the idea that some people are going to be vastly richer than other people. And those rich people do act as benefactors to the rest of us. They give more to charity. They start the new businesses that employ us. They take the risks that make capitalism dynamic and progressive. They act as society’s economic leadership team. And the individual members of that sector of society are constantly changing, and this is a good thing.

What’s more, in a free society, the rich are completely dependent on the poor and the middle class, who, in a market setting, make it possible for the capitalists of society to accumulate wealth in the first place. It is the voluntary choices of the masses that direct the use of society’s resources. The “distribution” of wealth is a result of the choices we all make in our capacity as consumers.

Yes, I’ve watched lectures by people who claim that societies with more equality are happier places. What they end up pointing to are places like Finland, Sweden, Denmark, Japan, Norway. This is just a mistake: These countries are demographically homogeneous and cannot be compared in any way to places like the U.K. or the U.S.

Consider this… Where would you rather live? Ethiopia or the Netherlands? Ethiopia has more income equality, according to the statisticians who calculate the so-called Gini coeffiicient. Another example: Tajikistan or Switzerland? The former has more equality than the latter. Another: Bangladesh or New Zealand? According to the egalitarians, we should rather live in one of the poorest places on the planet than one of the richest.

Again, the degree of equality is not in any sense related to the quality of life.

So why the hysteria right now? The real problem is more fundamental in the United States. The poor are growing and entrenching. The unemployed are staying this way. The middle class is slipping, and more substantially after the the recession statistically ended than when the statistical recession was on (and polls show that hardly anyone believes we are out of recession).

Now, this is catastrophic, not because this increases the income gap, but because it is killing the American dream. What the political left is doing is attempting to change the subject away from what matters (we are all getting poor) to what doesn’t matter (the income gap between the top and bottom). And this rhetorical shift is scary: It prepares the way for higher taxes, more redistribution, more attacks on the financially successful and more of all the policies that are causing our worst problems right now.

So why the focus on the equality? As Mises says in his great work Socialism (1922): “The principle of equality is most acclaimed by those who expect to gain more than they lose from an equal distribution of goods. Here is a fertile field for the demagogue. Whoever stirs up the resentment of the poor against the rich can count on securing a big audience.”

Americans should know better. Even when our economy was the freest in the world, we had one of the most unequal distributions of that wealth on the planet. It was during these years that the lifespans of everyone increased, when the chances of moving from poor to rich were huge, when the per capita income was growing as never before in human history. Growing inequality is likely to coincide with growing wealth (see How the West Grew Rich, the masterpiece by Nathan Rosenber).

We need to learn to admire the justly rich and strive to emulate them and their outlook on life. This is what the advice manuals of the late 19th century said. The most popular magazines of the time chronicled their lives, and they were held up as national heroes. This is a sign of a healthy society. It is because of this ethos that the poor of today live vastly better than the richest of the rich 100 years ago.

Today, on the other hand, we are told to resent the rich, attack them, hate them, expropriate them. This is the sure path to disaster. Freedom is what enables the poor to become rich. The state is the means by which everyone in society is driven into poverty. We need less state and more freedom.

Free markets, not China, could save the eurozone

Occupy Europe

By Nicole Gelinas

For nearly two years, Europe has tormented itself with increasingly convoluted efforts to avoid the only cure for its countries with excessive sovereign debt: selective sovereign-debt defaults. Last week came yet another self-delusion: news reports have European leaders hoping that the Chinese government will invest tens of billions of dollars in euro debt to help distressed European nations avoid default. The money would come with strings attached. In fact, a deal with China likely would be the ultimate self-inflicted deformity: Europe would give up some of its rights to free political speech so that it could use Chinese money to hold the withering judgment of free markets at bay for a while longer.

As with everything related to the ongoing global financial crisis, the situation is incredibly complicated. Last week, Europe pretended once again to have fixed its debt problem. Under the latest plan, lenders to Greece, including big French banks, are supposed to take a “voluntary” loss of half the face value of their Greek bonds. French president Nicolas Sarkozy and German chancellor Angela Merkel have insisted on this “voluntary” canard because an “involuntary” loss would be, well, a default. Official Europe wants to avoid a default, which would mean big payouts for speculators who bought “credit-default swaps”—yes, those things again—in anticipation of such a disaster. Europe wants to punish the speculators, whom the politicians blame for precipitating the sovereign debt crisis in the first place.

But this political and financial alchemy is itself a gamble. It’s not only speculators who bought the financial instruments that were supposed to pay off in the event of default. Investors who hold Greek bonds purchased them, too, to protect their bond investments (as bond prices go down, swap prices should go up). These investors have also bought credit-default swaps as a hedge against Italian, Portuguese, and Irish debt—and now they’re wondering if such “insurance” is worthless. “If you owned a sovereign bond and you got scared because you bought [credit-default swaps] thinking [they] would pay out, you’ll realize you would have been better off just selling your bond—and you’ll just get rid of everything,” AllianceBernstein’s co-head of credit, Ashish Shah, told the Wall Street Journal.

Since nobody sells a financial instrument that hedges against the risk of political default, investors don’t know quite what to do. It’s unlikely that they’ll start putting money into the bonds of the other struggling countries. These countries need new money, though, to refinance their existing debt. Indeed, last Friday, after the latest deal for Greece was announced, Italy had to pay even higher interest rates on its own new borrowing; it can’t keep that up for long. Unless Europe inflates its way out of this crisis, prevailing upon its central bank to print money to buy up all the stranded bonds, more Greek-style restructurings on other European sovereign debt are inevitable. And we haven’t heard the last from Greece: Monday, prime minister George Papandreou said that he wants to give Greek voters a direct say—via referendum—in the budget cutbacks they must bear as a condition of European aid.

The prospect of bigger losses for investors in sovereign debt terrifies France. Sarkozy knows that French banks can muddle through the Greek mess. But to bear losses on other countries’ debt, France would need to raise capital. If the private sector won’t provide this new money, the French state would have to do so—or risk losses for the bondholders of these banks. It gets worse: France doesn’t have unlimited funds to bail out “private” financial institutions, at least not without cutting back severely elsewhere and experiencing low growth for years. France may have to decide whether it wants to be Ireland—protecting lenders to its banks at the expense of its economy—or Iceland, letting bank creditors suffer losses to protect the nation’s long-term future. To avoid having to make this choice, France is looking east. Sarkozy hopes that China will invest some of its trillions in a new fund, which Europe would manage, to prop up the bonds of indebted eurozone countries.

But China’s participation is another self-set trap for Europe. China has no willingness to throw good money after bad. “Beijing must be given strong guarantees on the safety of its investment,” the Financial Times noted, citing two Chinese sources. Europe can’t offer explicit guarantees against loss without getting each country’s permission again—permission that the Germans, Finnish, Slovenians, and other Europeans are tired of granting.

If the past two years are any guide, Europe will try to get around this problem with wink-and-nod provisions. But either something is guaranteed, or it’s not. Otherwise, Europe would have to call the new fund the “Schrödinger’s Cat” fund (after the quantum mechanics example that calls on an observer to assume that a cat is both alive and dead at the same time). If Merkel were that brilliant a physicist, she wouldn’t have gone into politics.

The bigger problem is existential. As Sarkozy’s Socialist opponent in next year’s election, Francois Hollande, asks: “Are we supposed to imagine that if China comes to the aid of the euro zone, it will do so without expecting anything in return?” China likely would want Europe to stop criticizing it for undervaluing its currency—a government intervention that makes Chinese investments more attractive globally—or for “competing” through unfair trade practices. Giving China more room to compete unfairly costs European jobs. Sarkozy disavows concern. “Our independence would not be put into question” by a Chinese rescue, he told a French interviewer.

European leaders have said many things over the last few years of crisis. Here’s what they don’t say: bad lending and borrowing carries a hefty price, for borrowers and lenders alike. Someone, somewhere, has to pay that price. It is better for the financial system—“involuntarily”—to take the hit than to force these losses onto the West’s supposedly priceless political and market freedoms.

Saving the planet, rescuing the poor and regulating the rest of us

The “virtueocracy”

By MARGARET WENTE

Laurel O’Gorman is one of the faces of Occupy Toronto. She believes the capitalist system has robbed her of her future. At 28, she’s studying for a master’s degree in sociology at Laurentian University in Sudbury. She’s also the single mother of two children. “I’m here because I don’t know what kind of job I could possibly find that would allow me to pay rent, take care of these two children and pay back $600 each month in loans,” she said.

Ms. O’Gorman is in a fix. But I can’t help wondering whether she, and not the greedy Wall Street bankers, is the author of her own misfortune. Just what kind of jobs did she imagine are on offer for freshly minted sociology graduates? Did she bother to ask? Did it occur to her that it might be a good idea to figure out how to support her children before she had them?

She’s typical in her bitter disappointment. Here’s Boston resident Sarvenaz Asasy, 33, who has a master’s degree in international human rights, along with $60,000 in student loans. She dreamed of doing work to help the poor get food and education. But now she can’t find a job in her field. She blames the government. “They’re cutting all the grants, and they’re bailing out the banks. I don’t get it.”

Then there’s John, who’s pursuing a degree in environmental law. He wants to work at a non-profit. After he graduated from university, he struggled to find work. “I had to go a full year between college and law school without a job. I lived at home with my parents to make ends meet.” He thinks a law degree will help, but these days, I’m not so sure.

These people make up the Occupier generation. They aspire to join the virtueocracy – the class of people who expect to find self-fulfillment (and a comfortable living) in non-profit or government work, by saving the planet, rescuing the poor and regulating the rest of us. They are what the social critic Christopher Lasch called the “new class” of "therapeutic cops in the new bureaucracy."

The trouble is, this social model no longer works. As blogger Kenneth Anderson writes, “The machine by which universities train young people to become minor regulators and then delivered them into white-collar positions on the basis of credentials in history, political science, literature, ethnic and women’s studies – with or without the benefit of law school – has broken down. The supply is uninterrupted, but the demand has dried up.”

It’s not the greedy Wall Street bankers who destroyed these people’s hopes. It’s the virtueocracy itself. It’s the people who constructed a benefit-heavy entitlement system whose costs can no longer be sustained. It’s the politicians and union leaders who made reckless pension promises that are now bankrupting cities and states. It’s the socially progressive policy-makers in the U.S. who declared that everyone, even those with no visible means of support, should be able to own a home with no money down, courtesy of their government. In Canada, it’s the social progressives who assure us we can keep on consuming all the health care we want, even as the costs squeeze out other public goods.

The Occupiers are right when they say our system of wealth redistribution is broken. But they’re wrong about what broke it. The richest 1 per cent are not exactly starving out the working poor. (In the U.S., half all income sent to Washington is redistributed to the elderly, sick and disabled, or to those who serve them, and nearly half the country lives in a household that’s getting some sort of government benefit.) The problem is, our system redistributes the wealth from young to old, and from middle-class workers in the private sector to inefficient and expensive unions in the public sector.

Among the biggest beneficiaries of this redistribution is the higher-education industry. In Canada, we subsidize it directly. In the U.S., it’s subsidized by a vast system of student loans, which have allowed colleges to jack up tuition to sky-high levels. U.S. student debt has hit the trillion-dollar mark. Both systems crank out too many sociologists and too few mechanical engineers. These days, even law-school graduates are having trouble finding work. That’s because the supply has increased far faster than the demand.

The voices of Occupy Wall Street, argues Mr. Anderson and others, are the voices of the downwardly mobile who are acutely aware of their threatened social status and need someone to blame. These are people who weren’t interested in just any white-collar work. They wanted to do transformational, world-saving work – which would presumably be underwritten by taxing the rich. They now face the worst job market in a generation. But their predicament is at least in part of their own making. And none of the solutions they propose will address their problem.

Ms. O’Gorman, the graduate student in sociology, didn’t bring her kids to the Occupy demonstration in Toronto because she was worried about security. Still, she hoped they would absorb the message. “I’m trying to teach them equity and critical thinking from a young age,” she said. If she’d only applied a bit more critical thinking to herself, she might be able to pay the rent.

Why I'm stocking up on dehydrated prunes.

The Children Are Our Future

By Jordan Chittley

Most children can't wait to collect candy on Halloween night, but when homeowners don't hand out treats some dire consequences can follow.

Some kids calling themselves Children of the Hood wrote a letter to one homeowner in Oshawa, Ont.explaining that he missed Halloween and left the letter in his mailbox. They write that the lady who used to own the house handed out candy apples, "but last night there were no candy apples. Come to think of it there was no candy at all from your home!"

The kids explain the mistake and say the homeowner can fix it next year by passing out chocolate bars. They say they will understand he probably can't make candy apples because he is a guy and that they receive too many bags of chips so chocolate bars are the perfect solution. Another way to rectify the issue is for the homeowner to deliver candy to the children on Saturday because they will probably have eaten all of their candy from Halloween by then.

But the homeowner didn't deliver any candy, instead he posted the note on Kijiji saying he is looking for the author.

"Dear Children of Entitlement (and likely their parents)," starts the Kijiji post. "You have gone ahead and reminded me of why I do not want children, and why I weep for the future."

The homeowner says he was not home on Halloween and has bought a huge amount of candy, which he will enjoy with his friends on Saturday.

The Case for Legalizing Capitalism

The Immorality of Democratic Voting

by Kel Kelly

Businesspeople, if they are successfully "greedy," become rich by providing their fellow citizens (i.e., consumers) with things that make them better off. In other words, they have to earn it. But many who espouse that people don't need more than a basic level of existence, in their own greed, constantly vote for politicians who will take money from others and give it to them. They, just like the businessman, want more than they currently have. But instead of earning it as the businessman or capitalist does, the socialists steal it from those who have more. The business people's actions are moral (unless they earned their money by theft or by being given privileges by government), while theirs are not.

The sad fact is that this is exactly what our political system — democracy — is all about. It is a system where the masses, those with less money than the minority group that has great wealth, vote for politicians who offer to take money from the wealthy minority and redistribute it to them in return for giving the politician their votes.

Voting wealth out of the pockets of those who have it is socialism, because it is done for the "common good," for the benefit of helping that part of society that earns less. This is why democracy has been likened to two wolves and a sheep voting on what to have for dinner. This is also what is known as "social justice." Politicians are simply people who learn to be good actors in order to win your vote. They ultimately care little about real progress for the country or the lives of individuals; they care about their political careers.

Wealth redistribution, therefore, is theft. It is the taking by force from one group in order to give to another. Force is involved because anyone who fails to pay assessed taxes — confiscatory taxes that mostly go directly into someone else's pockets — will be put in prison. People from whom money is taken have not usually voted for this action,[1] but those who wanted to receive others' money usually have voted to take it from them. Many socialists will dispute this and argue that most people want to pay the amount of taxes they pay. This implies, for example, that when the government doubled the tax rate during the Great Depression, people, coincidentally, simultaneously wanted to voluntarily pay double the amount of income tax. It implies that when marginal tax rates reached 90 percent, people truly wanted to work and hand over 90 percent of their marginal earnings. The argument is too weak to take seriously. Besides, if most people want to pay all the taxes they pay, socialists will have no problem switching the payment of taxes from being required by law to being voluntary.[2]

Wealth redistribution does not involve only social programs such as welfare, Medicaid, and Medicare. It involves any occurrence of one party receiving money, physical goods, or services, that they did not pay the full cost of, but that another party did, on their behalf. For example, public transportation involves wealth redistribution because most who use it did not pay for the bulk of the cost. Even though they contribute by purchasing their tickets, the ticket is highly subsidized because wealthier taxpayers fund most of the cost.

Similarly, National Public Radio (NPR) is a wealth-redistribution program (mostly from the rich to the middle class). Many who listen to it paid taxes toward it, but many of those who do not listen also pay for it — and often pay more. If NPR is a viable business that would have enough people wanting to use it, it would be profitable on its own without government funding. If NPR could not survive without the government, it is a loss-making enterprise that is consuming wealth. That wealth could instead be used for profitable ventures, which would better serve society. We can see from this last example that only by having profit-and-loss statements can we determine whether a product or service is something consumers really want to have. There are never any profit-and-loss statements associated with anything the government operates, so we do not know which services are really beneficial in economic terms.[3]

Most of the taxes paid in the United States (and most countries) are paid by a small group of people: the rich. In 2005, 53.7 percent of all income taxes in the United States were paid by those earning over $200,000. Those earning between $100,000 and $200,000 paid 28.3 percent of all taxes. This means that 82 percent of all taxes were paid by those earning over $100,000.[4] Those with incomes below $40,000, in total, paid no income tax: their tax liability was more than offset by the tax rebates from the Earned Income Tax Credit. In other words, many receive money (from the rich) "returned" to them for taxes that were never paid.

Further, most taxes do not go towards essential government services such as road infrastructure, parks, education, the legal system, or police and fire departments — they go directly into other people's pockets. No more than 10 percent of the 2009 federal-government budget goes towards these essential government services (and most of these services are taken care of with separate state and local taxes). More than 65 percent of the budget goes towards social programs or some other type of income support or assistance. (Most of the remaining portion goes to fund our wars, or, "national defense" as it's called.)

Many claim, without an understanding of what's really happening, that somehow the rich take money from the poor. The facts show it is quite the other way around, considering the following numbers. According to a detailed report[5] by the Tax Foundation,[6] in 2004, the bottom 20 percent of all income earners received $8.21 in government spending for every $1.00 in total[7]taxes they paid (and $14.76 for every dollar of federal taxes paid). The middle 20 percent received $1.30 for every $1 in taxes paid. But the top 20 percent of income earners received only $0.41 for every dollar of taxes paid. (Though they don't give the figures for the top 5 percent of taxpayers, who pay almost 60 percent of all taxes,[8] their receipt of government spending, by logical deduction, must be below $0.05 or less for every dollar they pay.)

In dollar amounts, households in the lowest-earning quintile in 2004 received about $31,185 more in government spending than they paid in taxes, while the middle quintile received $6,424 more than they paid. The top quintiles, however, paid $48,449 more in taxes than they received in government spending. In the aggregate, the top 40 percent of income-earning households paid roughly $1.03 trillion more in total taxes than they received in government spending, while the bottom 60 percent received $1.53 trillion more in government spending than they paid in taxes (the difference being the amount spent by government in excess of what it brought in — an excess mostly financed by the future top income earners). This is wealth redistribution.

We can see from these statistics how absurd is the phrase "tax breaks for the rich." The rich do indeed benefit most from tax breaks because of the fact that they pay most taxes. Tax breaks are the giving back to the rich some of the money that was previously taken from them. Yet socialists call this redistribution from the poor to the wealthy! In other words, if the poor aren't allowed to receive as much of others' incomes as before, and the rich are allowed to keep more of their income, then, in the eyes of socialists, the rich are taking from the poor. This is like saying that a thief who must return a woman's purse after getting caught stealing it is redistributing money from himself to her.

Keynesian economics and Totalitarianism

Keynes Was No Liberal

By Allen McDaniels

While reviewing the writings of the revisionist historian and former teacher of mine James J. Martin, I came upon a reference to John Maynard Keynes's German-language edition of his General Theory, published in 1936.[1][2] In this edition, Keynes wrote a special foreword for his German readers. This foreword has been largely overlooked by hagiographers, economists, historians, and journalists — definitely by sympathetic politicians and bureaucrats. At the time of the German foreword, September 1936, Adolf Hitler's National Socialists had been in power for nearly four years.

The kernel of Keynes's thought is summarized in a short passage within the foreword:

"The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory.[3]

Keynes called his theory "general" because he claimed it would work not only in a laissez-faire setting but also, and more easily, in a totalitarian one. This contrasts with classical Austrian economics, which recommends free men and laissez-faire.

In a letter to Sir Percival Liesching of the British Board of Trade dated October 8, 1943, Keynes also made the following clear and unequivocal declarations:

Thank you for your note on state trading. If in this matter you leave loop-holes in your scheme, it will not upset me. Indeed, the more loop-holes you leave the wiser you will be in my opinion.

As you know, I am afraid, a hopeless sceptic about this return to nineteenth century laissez faire, for which you and the U.S. State Department seem to have such a nostalgia.I believe the future lies with

1.   State trading for commodities;

2.   International cartels for necessary manufactures; and

3.   Quantitive import restrictions for nonessential manufactures.

Yet all these future instrumentalities for orderly economic life in the future you seek to outlaw.[4]

The Obama administration's brain trust of Keynesian economists and sympathizers continue massive government intervention in the economy, euphemistically referred to as stimuli, in a vain attempt to rescue it from the brink. Thus far, such intervention has made any recovery more remote.

Is the administration at the same time working to create a totalitarian state where Keynesian economics has a better chance of success?

Do Americans want to sacrifice their remaining freedom in order to prove Lord Keynes correct?

Who is confronting the administration with these questions?

Notes

[1] Keynes, J.M. Allgemeine Theorie der Beschaftigung des Zines und des Geldes (Berlin and Munich: Duncker & Humblot; 1936, 1952, 1955, 1967).

[2] In Martin, J.J. Revisionist Viewpoints: Essays in a Dissident Historical Tradition (Colorado Springs: Ralph Myles, 1971), pp. 197 ff.

[3] Idem, pp. 203–5.

[4] Idem, pp. 198–9.