Farewell, Welfare State - Vivek Kaul's Diary
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Farewell, Welfare State

Jan 19, 2017

27

BALTIMORE - The tweet was never sent and never received...

'Lying Otto von Bismarck set us up for bankruptcy! What was he thinking? Sad!!'

Instead, Mr Trump said last weekend that, far from trying to curb the promises and cut the costs of the welfare state, he was nearly ready to unveil a plan to replace Obamacare with something better: a plan that would provide 'insurance for everybody'.

Impossible Bills

The liberal and illiberal elites are still trying to figure it out: Isn't that what Hillary was planning?

The Obama team - like the Bushes and Clintons before it - had already run up impossible bills at taxpayers' expense and offered all manner of unaffordable benefits.

Now, explained former Fed Chairman Alan Greenspan in his private conversation with us here in Baltimore yesterday, entitlements are out of control. The system set up by German Chancellor Otto von Bismarck in the 19th century is going broke in the 21st.

After the French Revolution, the elites of Europe realised they had to make peace with 'the people'. This they did, with Bismarck taking the lead, by promising people more in 'social welfare' benefits than they paid in taxes.

The difference between what they paid and what they got would come from two sources.

First, it would come from the rich, who would pay higher rates. Second, it would come from the next generation.

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Goldilocks Rate

As to the first, the elites ran into a problem.

They were the 'rich'. They didn't want to raise taxes on themselves! And along came economist Arthur Laffer with a handy theory explaining why they shouldn't.

Laffer claimed there was a 'Goldilocks' rate - not too high, not too low - at which the feds would collect the maximum amount of revenue.

A 100% marginal tax rate discouraged the rich from earning more money. A 0% marginal rate left the government with no revenue. The ideal rate must lie somewhere in between.

Besides, there really aren't that many rich people after all. And they tend to be hard to pin down. 'The art of taxation', former French Finance Minister Jean-Baptiste Colbert had explained in the 17th century, 'consists of plucking the goose to get the most feathers with the least amount of squawking.'

The rich tended to squawk. And since they were also the elite who controlled the system, their squawks were backed by campaign cash...their pain was felt...and tax rates at the top were brought down.

The presumed optimal tax rate, here in Baltimore at least, is right in the middle, between all and nothing - at 50%.

The second source of revenue was the more important one. From 1850 until today, each successive generation was reliably richer and bigger than the one before it.

For example, according to The Wall Street Journal, in 1970, 92% of 30-year-old Americans earned more than their parents at the same age.

But that source of funding is drying up. The Journal was reporting on a new study undertaken by Harvard, Stanford, and the University of California.

The same study found that only about half of 30-year-olds today earn more than their parents.

In other words, this generation has made no financial progress compared to the previous one. And taking just men, the situation is worse: Out of ten 30-year-old men, only four earned more than their fathers in 2014.

Headed for Bankruptcy

These results are based on government statistics, which we don't trust for a minute. So we will do our own calculation, reduced to the simplest terms.

A working man needs a pickup truck. How many hours of work does he need to buy one?

In 1970, the basic pickup cost 948 hours of work at the prevailing wage at the time. By 2016, it took 1,190 hours of shoulder-to-the-wheel labor to buy it - 25% more.

Few people realise that Bismarck's model of government is already headed for bankruptcy. The US federal debt will top $20 trillion this month. Over the next decade - if there are no tax cuts and no spending increases - it will rise to $30 trillion.

So far, the money still flows to the baby boomers. And the evidence of impending doom is hidden by record-low lending rates.

But the feds are no longer counting on the next generation to make the welfare state work; they're sending the bills to a future generation that has not even been born yet. What they will do when they get the bill, no one knows.

'I don't know how this is going to end,' Dr Greenspan told us gloomily.

None of this was probably obvious to the average Trump voter. And maybe not even to Citizen Trump. But it will be soon.

Regards,
BILL BONNER Founder, Agora Inc
Bill


Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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