The Political Defense of US Capitalism

Storm Clouds of Socialism                           (c) Can Stock Photo / leedsn 

This essay is a continuation of my previous post Can U.S. Capitalism Be Supported Politically? The motivation for writing these posts is the realization that with current social and economic attitudes, especially among Millennials and the Democratic Party, defending capitalism in the United States might be a very tall order. However if those of us who would defend it fail, the U.S. economic and political environment could get very hellish, very quickly.    

More Government Damage of the Economy

Unfortunately, we have already traveled a long way in the direction of economic Hell. In my last post I demonstrated that if we were to increase both taxes to fund more transfer payments to the poor and government spending to make these transfers, we would most certainly decrease both economic growth and government revenues. The fundamental reasons for this, expressed in the Rahn and Laffer curves, is the denial of economic capital to wealth production and the consequent reduction of tax revenues. If government went ahead with the transfer payments anyway, they would increase government deficit spending, increasing future interest payment burdens from the national debt.

While the national debt is not currently on most people’s radar and certainly has not been discussed much in the presidential campaign, in about 10 years people are not going to see much else in the public square. The pieces of government that are about to eat everyone’s lunch are the major entitlements: social security, medicare, medicaid. Gradually, as more baby boomers retire and the number of workers supporting them decreases, the burden on the GenX-ers and the Millennials of supporting the retired will begin to crush everyone. The basic problem is shown below in a bar chart produced by the Peter G Peterson Foundation using Social Security Administration data. The bar for 2030 of course is an estimate,

Remember that Social Security is essentially a Ponzi scheme, as I discussed in The Hard Work: Cutting Entitlements. As soon as Social Security payroll taxes roll into the Social Security Administration (SSA), the SSA pays them out as benefits. In fact, starting in 2010 the SSA did not have enough revenues to cover benefits and had to start spending money from the government’s general fund to cover them all. Just how bad it will get is demonstrated by the bar chart below, put together by the Heritage Foundation using SSA data. The bars after 2014 are estimated data.

The surpluses before 2010, the amount of the difference between SSA payroll tax revenue and paid out benefits, were used to buy unmarketable special treasury bonds. These were essentially just accounting tools to show how much the government would need to pour back into benefits, as necessary. The surpluses went into the general fund to be spent by politicians on other projects. Since Medicare uses the same Ponzi scheme structure and deals with the same populations, its problems are similar in kind.

As the payouts to recipients begins to exceed the payroll taxes, the federal government will be obligated to make up the difference from its general fund. Once total current government obligations, including paying interest on the national debt, exceeds all tax receipts plus bond sales, the entire system will begin to collapse, ultimately leaving Social Security recipients with nothing. It will also likely leave us in a considerably deeper depression than the Great Depression, as the federal government ceases meaningful operations due to lack of assets. This is likely to happen within one to two decades.

A related problem I wrote about in Will the U.S. Have Troubles Soon Financing Its Debt? is the increasing trouble the federal government is going to have in getting anyone other than the Federal Reserve to buy its debt. With all the rest of the world needing more capital to face the problems of the growing global recession, U.S. long-term debt is being dumped from sovereign wealth funds onto the international markets at the fastest rate in 15 years.  It is hard to visualize when foreign governments might have the proclivity to buy long-term U.S. treasuries again. By the time that might happen, the U.S. government’s credit rating would be non-existent. If only the Fed buys treasury bonds, the money created to buy those bonds – which the executive branch will spend immediately, of course, injecting it into general circulation – should be enough to kick off a truly huge round of inflation.

In the face of these catastrophes we are supposed to increase taxes to pay for more transfer payments? Are we not facing enough financial catastrophes as it is? We can go in the direction of more Socialism, which destroys our capacity to create wealth, only if the American people have a death wish for their economy. Is this not exactly like Greece?

In the process of trying to cope with all these financial problems, the federal government has been creating a very hostile economic environment for American corporations trying to create wealth. Besides an extremely punitive and destructive regulatory environment (see The Burden of Government Regulations; The Debilitating Effects of Obamacare; The EPA, CO2, Mercury Emissions, and “Green” Energy; and Economic Effects of the Dodd-Frank Act), corporations must also  confront a world-wide tax-regime that has the highest corporate tax rates in the world (except for Chad and the United Arab Emirates). Both economic regulations and taxes have been placing multinationals in an impossible, uncompetitive position relative to their overseas competitors. As a result, some companies have packed up and left the United States to resettle in foreign countries, taking money, intellectual property, and jobs along with them. Reportedly, many more companies are considering such corporate inversions. To go even further in the direction of socialism (more regulations, higher taxes, more wealth transfers) will inevitably push even more companies out of the United States. I believe this is what is known as “killing the goose that laid the golden eggs”!

Political Consequences: The Road to Serfdom

But there will be even more serious problems caused by a move toward Socialism, as Friedrich Hayek taught us long ago in his classic book, The Road to Serfdom. As progressively more economic power is centralized in the state, ruthless and unscrupulous men willing to use such power to further their own ambitions tend to find themselves in control of government. We have already seen such results in both state and federal government, as I documented in The Corruption of the Democratic Party. Although I wrote this last post mainly about Democrats since they seem to be the biggest sinners, I did mention a few examples of Republican sinners as well.

Gradually gaining total control of the economy through increasing regulations and taxes was the route to socialism Germany took traveling from the Weimar Republic to Nazi Germany. What makes Hayek’s observations

of this transformation particularly authoritative is that he was both an economist of the Austrian School of  economics and a person who closely observed the progress of the Nazis leading up to the Anschluss of Austria with Germany. Hayek lived what he described.

It used to be popular, and in some quarters probably still is, to describe the Nazis as a right wing reaction to the communists. However, as Hayek pointed out, it is illogical to classify the fascism of Italy and the National Socialists of Germany in pre-World War II Europe as on the opposite side of the political spectrum from socialists and communists (chapter 12, Road to Serfdom). The Nazis were instead just another variant of socialism that had the same roots in central planning and in allowing the state to dominate the individual. It is logical then to describe the efforts of progressives to gain increasing economic power and political control over individuals as a tendency to fascism.

It is not only the economic problems that a move toward Socialism would cause, but also the loss of our individual freedoms that should deeply worry us.

How to Defend Capitalism in the U.S.

With all of these reasons to believe the descent to socialism would be catastrophic for everyone, the poor and the middle class included, how can capitalism be defended to avert the disaster? Part of the impetus toward socialism is the belief by many, especially the young, that transfer payments through various welfare programs are necessary to make life even bearable for the poor. This is probably the strongest and most persuasive argument of the Left. But the Right has no need to cede compassion and generosity to the Left. In fact there is some evidence, albeit greatly disputed by the Left, that conservatives are more generous in giving to charities than the Left. Yet, the economic problems of the very poor are not something that even a conservative government can ignore.

At the same time government can not encourage the poor to subsist totally on the largesse of the state. Welfare programs that are purely transfer payments should be eschewed, not only because of the stultifying effects of a continuous life on the dole, but because it is an approach that guarantees the growth of the population on the dole. Such programs extend the culture of poverty. Any conservative program to ameliorate the economic problems of the poor should require, in exchange for financial support, efforts to either educate themselves to be able to hold a good paying job or to be actually looking for such a job. These “work requirements” were the heart of welfare reform during the Clinton administration, forced on Clinton by a Republican Congress. Unfortunately, Democrats have shown many signs of wanting to gut welfare programs of these requirements. See here and here and here and here. In addition there are noneconomic ways of attacking the culture of poverty, such as encouraging students to complete their education (perhaps modifying schools to better handle children of the poor), and not to have children out of wedlock. This is an argument between the Left and the Right that will continue, and is an intimate part of the discussion of whether our mixed capitalist economy should move closer to Socialism or to Capitalism.

While giving evidence to the electorate that conservatives have a concern for the poor as well as ideas for lifting people out of poverty that actually work, conservatives defending American capitalism must continually remind everyone who will listen to them of all the ways in which the intrusion of the state is progressively destroying our economy. We have a rich field of evidence that is not limited to our country, as the entire world seems to be making the same kinds of economic mistakes our country is making. If the majority of the electorate is not yet persuaded, they will eventually be hard-put to deny the disasters that will follow a Hillary Clinton or Bernie Sanders presidency.

I just wish that damned apocryphal chinaman who cursed us with “May you live in interesting times” was not so damned correct!

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