Romans during the Decadence by Thomas Couture. Is the West retracing the steps of the ancient Romans?
Wikimedia Commons / Thomas Couture (1815-1879)

I often get the feeling  my fellow citizens do not understand how much most nations comprising Western civilization, including the United States, have been decaying. They have shown they know something is greatly wrong with our societies. This is evidenced by populist rebellions during recent elections and referenda in the United States, Great Britain, France, and Italy, among others. Nevertheless, do the various electorates of the West realize the decay poses an existential threat?

Evidence for the Decay of the United States

There are many portents  to which we can point to demonstrate our more than serious perils. There is the great reduction in defense spending throughout the West despite the increased military threats from Russia, China, Iran, and militant muslim jihadis. There is the growth of the welfare state and a growing inequality in income distribution. But most of all we can see the decay of the West in the stagnation of economic growth that borders on outright economic decay.

As an American, I have concentrated in writing about such evidence for the United States. One image I have repeatedly used is an extrapolation of the growth of U.S. mandatory entitlement expenditures and total federal government revenues to show that in approximately a decade the federal government will become completely insolvent.

What this plot demonstrates is that just expenditures in the mandatory entitlements plus interest on the national debt will totally absorb every single penny of federal revenues by 2031. If you also include some discretionary spending, such as for the maintenance and operations of the armed forces, the date of financial Armageddon will most likely fall sometime between 2025 and 2030. An extrapolation of this nature of course assumes nothing relevant to the growth rates of expenditures and revenues will significantly change. However, before they can change, voters will need to realize the danger and insist on their change.

Another set of evidence I have repeatedly used is the long-term trend of GDP growth in the United States. A Gallup Organization economist, Jonathon Rothwell, showed us this with a moving time-average of U.S. GDP over ten-year periods, which is shown below. You can download a PDF with a report of his research here.

Clearly, the dashed linear trend line since 1966 has negative slope, with the actual 10-year average in 2016 getting fearfully close to zero. Should it actually reach zero, Federal revenues will inevitably cease growing and inevitably decline. This would have the effect of almost immediately bringing about federal insolvency at that time. To see this, imagine figure 1 with the green revenue curve becoming a decreasing function of time beyond the year 2018. The federal government would mostly cease to exist as a financial entity.

The virtue of these kinds of moving time-averages is that they average over the business cycles to reveal the long-term trends. Plotting the annual GDP growth rates only, especially if they wildly fluctuate around the long-term average, can easily obscure the long-term trend. You can see this by recreating the moving time-average above and then plot the actual yearly GDP growth rates on top of it. The result is shown below.

The curve for the moving time-average looks a little different from Jonathon Rothwell’s rendition because my vertical scale varies from -4.0% to +6.5%, whereas Rothwell’s varies from 0.0% to 3.5%. Also my horizontal time scale is longer by about 6 years. Both changes of scale make the moving average curve look somewhat flatter.

Government tax revenues obviously depend on the size of economic output of the nation. Should that economic output decline continuously in the long-term, there is no other possibility than for government tax revenues to fall. In the United States, because Americans have had historically a great cultural aversion to regressive taxes, the relationship between tax revenues and GDP has been given since the late 1940s by Hauser’s Law.

Hauser’s law is an empirical statement that no matter what the maximum marginal tax rates, the federal tax revenue will always be around 19.5% of GDP plus or minus a few percent. The reason Hauser’s Law exists is the highly progressive nature of U.S. taxes. The U.S. taxes its rich far greater than the middle class. (The poor essentially do not pay income tax in the U.S.) In 2014, the top 20% in income  paid 84% of income taxes. So long as American taxes are this progressive, tax revenues will essentially be limited to the percent of national income earned by the top 20% of earners. Hauser’s Law combined with the long-term reduction of the GDP growth rate to almost zero spells the economic doom of the federal government.

A friend of mine recently pointed out that it is possible to effectively repeal Hauser’s Law, allowing the government to tax far more than 20% of GDP. After all, most Western governments tax somewhat more than 40% of their GDP. If you look at the OECD comparative tables giving countries’ total tax revenues as a percent of GDP, you would find figures for 2016 that are quite astounding: Denmark taxes away 45.9% of GDP, France 45.3%, and Italy 42.9%. At the lower end of the OECD scale, we find Ireland at 23.0%, South Korea 26.3%, Switzerland 27.8%, and the United States 26.0%. The U.S. figure is not the 20% we would expect from Hauser’s law because it includes an average 6.0% of GDP contributed by state taxes.

The reason European countries can do this is they do not get 84% of their taxes only from the top 20% in income. Instead, they set the income level at which the top tax rate takes effect in the lower middle class. The thresholds for the top tax rates in the U.S. and for the average Western European country a few years before 2010 are given graphically below.

In addition to this fact, Europeans generally add a type of national sales tax, called a Value Added Tax, on top of the income tax. Lowering the income at which the highest tax rate is assessed to the lower middle class, and adding a VAT, the U.S. could also tax away between 40%and 50% of the GDP. But do we really want to do it?

Suppose that as in Europe the top marginal tax rate in the U.S. began at $58,000 of adjusted income (after all deductions have been subtracted). Just to be generous, let us take that top marginal tax rate to be the new lower one enacted in the Tax Cuts and Jobs Act, which is 37%.  Then the taxes out of $58,000 would be $21,460, leaving the taxpayer with a disposable income of $36,540. How long after proposing such a tax change do you think it would be before irate taxpayers would begin lynching the responsible politicians?

Evidence for Economic Decay in the Rest of the West

What about evidence for economic decay  for the rest of the West? The previous section gave some of the evidence for the United States, but what about Western Europe? The easiest way to answer the question would be to calculate the same 10-year moving time-average of GDP growth for the European countries. Doing this calculation for some of the largest and more important European countries led me to the plot below for some of the Northern EU countries.

With the conspicuous exception of Ireland, most European countries had similar GDP trajectories to the U.S. During the 1970s, Europe was still catching up with the U.S. after the destruction of World War II, but soon thereafter they began to show similar behavior to the U.S. The long-term performance of the U.S.relative to Northern Europe did not fall to the bottom until the Great Recession of 2008-2009 and the advent of the Obama administration. The outsized performance of Ireland will be discussed in the next section, and then in my following post.

Doing the same thing for the Scandinavian countries, whom Bernie Sanders seems to think we need to emulate, we obtain the following plot.

Again, the Scandinavian countries have followed the same declining long-term GDP growth trajectory as the United States, with the United States falling to the bottom of the group in performance after the Great Recession and during the Obama administration.

Finally, the ten-year moving time-average of Southern EU countries tells a similar tale. If we go through the same exercise for some of the major Southern EU countries, we get the following plot.

However, as bad as the U.S. performance has been since the Great Recession, that of the Southern EU countries, with the exception of Spain, has been even worse.

With the significant exception of Ireland, Western European countries all seem to be suffering the same economic stagnation as the United States. What then can Ireland tell us about how to remain economically healthy and how to avoid economic decay?

The Way Back and the Great Irish Exception

So what can we do  about the economic rot endemic in the West? What has Ireland accomplished to buck the trend? I will discuss this in my next post, but I will leave a hint. According to the Heritage Foundation’s Index of Economic Freedom, Ireland is the sixth most economically free country in the world. This suggests the question of what is meant by “economically free.” In the context of the index of economic freedom, the freedom referred to is freedom from government control of the economy.

What I believe the evidence will show is Western nations, including the United States, have victimized themselves by taking on an increasingly fascist nature. Unlike progressives accusing neoliberals of being fascists, I am using the word “fascist” quite advisedly. Fascism by definition is an authoritarian state in which the economy is completely controlled by government. What separates fascism from other forms of socialism is the fiction that the “owners” of businesses actually control them. Instead, the government completely controls companies in all important respects through regulation and diktats, relegating company officers and owners to apparatchiks of the state. One of the foremost examples of fascism in the world today is Russia.

Progressives and their dirigiste kin in Western Europe have told themselves a fundamental lie: They tell themselves they can solve social and economic problems with the coercive power of government without creating other problems of equal or greater malignity. Yet, the nature of fluid, chaotic systems of interacting human beings will not grant progressive governments this capability. In support of this lie, they tell themselves other lies, such as their ideological opponents are really fascists and free-markets encourage increasingly unequal income distribution. They also falsely claim businesses are basically enemies of the people and must be closely regulated by government.

The economic decay of the West demonstrated by the declining long-term growth rates is one of the fundamental pieces of evidence dirigiste government can not possibly work well. To pull back from the economic abyss, progressives and other dirigistes need to recognize this together with all the phenomena pointing this out. Then, all of us must change our views of what government can do for us, and find new ways for attacking our social problems.

The great economic success of Ireland, examined in the next post, will be another major piece of evidence pointing in the same direction.

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