It’s time to undo the damage and look at ways to invest public finances more productively. This essay came about as a response to an article in Quillette entitled: Flying Cars: What, How, When, and Why? . I particularly liked the section detailing the distinctions between applied and theoretical science. But as to the larger thrust of the essay, I would argue we should look at things from a far simpler perspective- follow the money! The author correctly places the beginnings of the decline in the 70s, but I would argue that the turning point occurred a decade earlier with the introduction of LBJ’s War On Poverty. We can see the effects on development research in this simple graph.
Whilst it might be perfectly legitimate to argue that taxes should be distributed differently, the fact that there are finite limits to tax and that sometimes higher taxes have trade-offs- as people work less when the returns are lower or decide to retire off into the sunset when taxes get too high- is harder to dispute. Put another way, did LBJ’s War on Poverty redistribute finite resources in such a way that it both broke some of societies more benign systems and features and drew money away from government projects or enterprises which had greater net positive effects, per dollar spent? The answer would have to be yes on both counts.
The first thing to consider is that much of the War on Poverty’s prescriptions were based upon a top-down approach and came as a result of the prevailing viewpoint of some economists that with productivity increases the labour a society needed would become finite, that government would have to pay people to stay home. Welfare must have seemed like an easy way to reconcile the interests of two competing constituencies with the Democrat coalition- those of white blue collar workers and African Americans- with the interests of white blue collar workers winning out over those of African Americans. The solution of the War on Poverty reduced competition between these two groups, for what many believed would become an increasingly scarce resource- that of labour. Of course, they couldn’t predict the unprecedented growth of the service sector, but this is the problem with all top-down prescriptions- they fail to anticipate the unpredictable.
For the second thread we need to look to China. Although China may be authoritarian in many respects, one area is which it is not is in the area of taxation. Only a couple of years ago China taxed around 24% of all wealth generated, compared to roughly 40% in America (including state and local), and around 50% in Europe. But what is more interesting is not how much is taxed, but rather how is it spent? In China, only 20% is allocated centrally, with the remaining 80% devolved out to the regions. A huge amount of this resource is spent on economic development.
I don’t think it’s an accident that when we look to each countries or regions share of total world GDP China’s share has rapidly grown whilst America’s has declined, and Europe’s has declined most rapidly of all. This effect is seen in two ways. First, taxation removes energy from a system which might otherwise be expended in a manner which is more productive, and social spending or government jobs aren’t always net positives compared to the alternative. Second, it would seem that a government’s resources are better deployed in creating the right conditions for economic opportunities for its citizens, rather than trying to ameliorate the damage of not doing so. If we were to poll people who were beneficiaries of government largesse, I am sure that with the exception of the mothers of young children, most would rather see more economic opportunities for their community, rather than more ‘help’ from government.
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The third factor to consider is the damage done by welfare systems. Going back to the LBJ era, it would have been relatively easy to redesign welfare systems so that they were simply an income supplement for the working poor. People could have had a basic state entitlement, which could have then been removed at the rate of between 25c and 33c per dollar earned, instead of losing all their welfare with the first dollar earned. But that isn’t what happened, more is the pity. And through this obstinacy we can be that the main objective was not to help people but to reduce labour competition in general and between two competing, yet aligned interest groups- no doubt it also created a new class of loyal bureaucratic government worker and strengthened the negotiating power of unions through reduced labour competition.
But the damage done was catastrophic. Whether we look at the white working class in Britain (along with Bangladeshi British and Afro Caribbean British) or African Americans, the effect of these welfare programs caused lasting harm because they not only disincentivised work, leading to intergenerational poverty, but also disincentivised fatherhood. And we now know that the rates of fatherhood in a community are the primary driver of social mobility, the ability to escape poverty through positive role models. The only thing which caused equivalent damage to certain groups was public housing. Although public housing can be a positive force when its provision is designed to help the working poor, the nonselective high density public housing projects of the post war period were an amplifier of social ills and a disaster of equal magnitude wherever they were tried, for the simple reason that they were indiscriminate.
There are positive types of government spending. Research- specifically in areas where the risks are too high or the pipeline of economic pay-off is too distant for the market- is one them. Another is nuclear power. Germany and France are of equivalent geographical size and climate. Because Germany decided to pursue renewables and get rid of their nuclear power, their consumers pay twice as much for energy which produces ten times as much carbon dioxide. Even the most extreme estimates place the number of deaths through nuclear power at below 3,000 worldwide, whilst it has saved countless millions in improved air quality.
Western decline began with the Governments of the West. They could have invested public funds wisely, creating future wealth for generations to come. With the economic growth that followed it might have been a lot easier to institute social spending programs which were a much smaller share of the total pot of government funds. Instead they put the cart before the horse, and the West began to stagnate. Virtually every societal problem which has occurred since, whether it is lower rates of fatherhood or mass incarceration (the two are inextricably linked), is a function of these shifting priorities in government spending.
There is a solution. It comes by gradually replacing social programs and government lending to students which zero interest debt. Fiat money was ultimately designed to create sufficient capital for investment, to stimulate the economy. There is now so much capital in the world today that prudent governments can borrow at negative interest rates. We should no longer create fiat money, and there really is a question mark over whether banks should still indulge in fractional reserve lending, now that we know that a world of interconnected and interdependent financial institutions creates the issue of financial contagion and system-wide collapse.
Direct commissioning of zero interest debt for citizens is another case entirely. Because it is direct and closed loop, there is little risk of inflating demand beyond supply and causing inflation. Over time the debt would shrink in real terms, and much of it would be recoverable at the point of death. Central banks routinely eat the toxic debt of business failures- why can’t we demand they carry the can for our own citizens.
With student debts we could even consult the actuarial tables to set thresholds for repayment by degree type. With a zero interest Graduate Contribution Scheme an engineer with an undergraduate degree might find they only start to repay once they are earning over $30,000, for a Liberal Arts degree the threshold might be $10,000. This would allow students to select courses or vocational training likely to land them a decent job.
Unlike conservatives, I don’t see government as innately good or bad, but what I would concede to conservatives is that when political leaders make bad decisions we often have to live with the consequences for decades. We need a better system for Government to own up to its mistakes and to agree to fix them- otherwise we simply live with the consequences forevermore.
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