Impossible Bills

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.

 

The “iron chancellor” Otto von Bismarck, wearing the type of helmet one shouldn’t leave lying around on a chair. Bismarck was responsible for the unification of Germany, which he achieved by engineering several wars as prime minister and foreign minister of Prussia. Prussia waged war against Denmark, Austria and France, and defeated all of them. Bismarck then unified the independent German states, city-states, bishoprics and principalities partly by annexation and partly by negotiation. Once Germany was unified, he was appointed “chancellor of the empire”. It was as though he was finally promoted to a post beyond his competence, in line with the Peter principle. First he embarked on the so-called Kulturkampf, aiming to undermine the power of the Catholic Church. The Church fought back by entering into a powerful political alliance with the Center Party. Bismarck abandoned the effort when he realized that secularists were using it to attack religion in general and that he would need the Center Party’s cooperation. Shortly after Germany’s unification, Europe was struck by an economic depression (incidentally, the term “crash” was coined when stocks cratered on the Vienna stock exchange in 1873). Bismarck immediately ensured that the depression would get worse by introducing tariffs in order to “protect” German industry. As the economic downturn predictably intensified, the popularity of socialism increased markedly. Bismarck responded by banning all socialist organizations and literature in 1878, which utterly failed to quell the rise of the socialists. In a renewed effort to undermine support for them, Bismarck introduced the welfare state in the 1880s, which 140 years later is in the process of bankrupting all of Western civilization. Do we have anything good to say about the man? Yes, we do. In contrast to his time as Prussia’s prime minister, he eschewed war as chancellor of the empire. In fact, he did everything in his power to preserve peace in Europe – it was by far his greatest concern. One year before his death he darkly predicted: “One day a great European War will come out of some damned foolish thing in the Balkans.

 

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 a few days ago, 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 realized 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.

 

According to this chart, entitlement spending plus interest expenses will consume all tax revenues by 2033. A similar estimate made in 2007 predicted that this point would only be reached in 2052. The above is the most recent estimate we could find in chart form, but it is outdated already: more recent estimates are pointing to 2025, a mere 8 years from now. In other words, as of 2025, every cent of discretionary government spending will have to be borrowed (or printed by the Fed). Unfortunately, this is definitely a credible forecast. Consider a few data points: from 1790 to 1913, government spending averaged just 3% of GDP; government was but a footnote in most people’s lives. After a large spike in WW1, spending declined sufficiently to return to this long term average by 1930. Alas, then came the depression, and FDR came to power. Today government spending stands at approx. 26% of GDP (still a lot lower than in most of Europe, which is facing similar problems). Every fifth US citizen is dependent on the government, not including government employees. Between 1962 and 2011, the “index of government dependence” has soared from around 12 points to 332 points. Between 1965 and 2010  real GDP grew 2.7 times, while entitlement spending soared 10.6 times (the “war on poverty” began in 1964 and the relentless decline in poverty in evidence previously almost immediately came to a screeching halt, vividly illustrating the fundamental  boondoggle qualities of this program; in fact, it is probably the greatest government boondoggle in history). According to CBO projections (which tend to err on the side of optimism, since they inter alia fail to account for economic busts and rising interest rates), mandatory spending will reach a towering $7.4 trillion in 2032, while discretionary spending will amount to around $2 trn., for close to $9.4 trillion in total government spending. No hints were provided as to how exactly GDP and government revenues will magically triple in just 15 years. It seems that contrary to Keynes’ famous bonmot, we are not “all dead in the long run”; instead the long run is about to catch up with us – click to enlarge.

 

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.

 

Arthur Laffer and his famous curve. He undoubtedly had the right idea in principle, even though there exist no smooth “curves” in the real world of human action. Nevertheless, it seems glaringly obvious that rapaciously high tax rates will destroy economic incentives, which will invariably lead to lower economic growth and hence lower government revenues as well. Entrepreneurs will waste a great deal of time and effort on how to best avoid taxes, rather than focusing on how to best serve their fellow men with cheaper, better or new products and services. Some people will be unnecessarily tempted to break the law, as tax evasion will be promoted as well. Excessively high taxes are definitely an all-around lose-lose proposition.

Photo credit: United Press International

 

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 10 30-year-old men, only four earned more than their fathers in 2014.

 

French bureaucrat Jean-Baptiste Colbert, minister of finance under Louis XIV. Colbert was the father of mercantilism – he erroneously believed trade to be a zero-sum game, in which one party is always fated to lose what the other party gains (this misguided idea informs politics to this day). His main goal in life was to increase the power of the State. He eagerly went about obtaining as much tax revenue as possible and brought artists and intellectuals under almost complete state control (they were supposed to focus exclusively on serving the sun king and his interests). Colbert’s success as a “goose-plucker” made him a rich man; while allegedly serving the public by ruthlessly oppressing it, he amassed a huge personal fortune.

Painting by Philippe de Champaigne

 

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.

 

It should be no surprise that the hours of work a median wage earner needs to put in to buy a basic pickup truck have increased by 25%. There are a great many studies presenting statistics on growing wealth disparities and the stagnation of median household incomes (note that all such statistics have to be taken with a grain of salt. The economy cannot be precisely “measured”). The chart above is an updated version of a chart that appeared in a lengthy study by the left-leaning “Economic Policy Institute”. We added the remark about Nixon, the gold exchange standard and fiat money to it. Guess how many times the following terms are mentioned in the study: “gold”; “fiat money”; “credit expansion” and “money supply”. If you guessed “zero”, you are exactly right. As is the rule with such studies, the monetary system seems to be off limits and is simply not discussed, never mind questioned. The central planners overseeing it rate a brief mention, but the only criticism that is offered is that the Fed allegedly “prioritized low rates of inflation over low rates of unemployment in recent decades” – in other words, monetary policy wasn’t loose enough! This is the by far most absurd thing the authors of the study could have possibly said about the Fed’s role in promoting inequality. Mind, we don’t even agree with the notion that inflation and employment are inversely correlated – this idea has been debunked ages ago, and neither sound theory nor empirical data support it in any way. It is nothing but an article of faith. By contrast, the non-neutrality of money, which results from the manner in which newly created money enters into and spreads through the economy, and the associated effects of money supply expansion on the distribution of wealth have been ascertained by sound, logical economic reasoning. These things have been known for centuries, but admitting to their validity would ultimately force economists to bite the hand that feeds most of them. Hence, crickets. Luckily we don’t depend on said hand, which has the not inconsiderable advantage that we are free to give voice to sound economic theory. Incidentally, quite a few fairly comprehensive missives on inequality penned both by ourselves and other authors have been published here in the past (see for instance “Modern-Day Social Engineers and Wealth Inequality”; more articles on the topic can be found by Googling “acting man, inequality” or “acting man, wealth and income inequality”) – click to enlarge.

 

Few people realize that Bismarck’s model of government is already headed for bankruptcy. The U.S. 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.

 

Charts by: Heritage Foundation, Economic Policy Institute

 

Chart and image captions by PT

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

7 Responses to “Farewell, Welfare State”

  • herepog:

    More B Bonner know-nothingness:

    Re: “Shortly after Germany’s unification, Europe was struck by an economic depression (incidentally, the term “crash” was coined when stocks cratered on the Vienna stock exchange in 1873). Bismarck immediately ensured that the depression would get worse by introducing tariffs in order to “protect” German industry.”

    And in the end Germany vastly outgrew the UK by every economic measure and did so by rejecting “free markets” and by imposing tariffs on imports to protect German industries. Research Georg Friederich List and the National System.

    Austerity is a boondoggle for the rentier class. See: Blyth’s: Austerity:The History of a Dangerous Idea”; and/or “Mark Blyth: “Austerity – The History of a Dangerous Idea” | Talks at Google”: 1:07 hr https://www.youtube.com/watch?v=JQuHSQXxsjM&t=3s

  • woodsbp:

    1870 ain’t 2017. They had no anti-biotics; no electricity; no internal combustion (fixed diesel was a few years off); no internet; no credit cards; no tee-wee, etc., etc. Temporary credit was always available – at 200% interest!

    It was slowly, and quite grudgingly accepted that the steady technological advance of Capitalism required something other than the Free Market. Some called this ‘welfare-ism’ Communism; some Socialism but what it actually was (and still is) is an essential economic externality without which Productive Capitalism cannot continue to be successful. However, some elements of Financial Capitalism can be successful in the absence of welfare. Though what will happen to the remainder (insurance; real-estate; education) when the disposable incomes of the majority of wage and salary earners (ie. real taxpayers) are no longer in a financial position to support existing or additional loan repayments, rentals and other forms of dividend extractions – is not a trivial matter that can be glossed over.

    Consumers in a Capitalist system must have adequate incomes to avail of the many goods and services that comprise a modern Capitalist economy. Try to imagine a state which has zero manufacturing output and no housing or infrastructure constructions and subsistence agriculture. So, would a services only economy be actually able to sustain the population in a reasonable, western-style standard of living? I doubt it.

    The current distraction with Minimum or Living Wage is like using a mule (income) to tow your overloaded truck (living expenses). You have to lighten up the load first. Not hitch up a second mule.

    dani-d: “One day, you buy a mechanical cement mixer. The same worker, using the cement mixer, can mix 100 litres of cement in 30 mins. Now he is 20 times more productive. Do you think you should give him a raise and pay him $400/hour?”

    Nice one dani! Actually the increase in human productivity is zero! Its the ‘robot’ what is productive. Give that ‘robot’ an hourly wage and then you could extract income tax! You will have course have to provide the robot some ‘welfare’: it has to be maintained in good working order ;-)

  • dani_d:

    Why should worker compensation increase with productivity?

    Let’s say you employ a construction worker. He can mix 10 litres of cement in one hour using a simple spade. You pay the construction worker $20/hour .

    One day, you buy a mechanical cement mixer. The same worker, using the cement mixer, can mix 100 litres of cement in 30 mins. Now he is 20 times more productive. Do you think you should give him a raise and pay him $400/hour?

    • Hans:

      Another excellent post by Mr Bonner! Yes, just ahead will be
      a series of economic crisis if spending and debt by governmental units
      are not reigned in. 2035 at the latest and more likely sometime
      between 2025 and 2030.

      BTW, dani, do you think workers are dat stupid?? They will just
      go to their local Citi store and get a loan for a mixer and now
      his former employer will have another competitor.

      This is not theory but concrete in work!

  • zerobs:

    It will end with state sanctioned murder, as it always has.

    • jks:

      …but we will be looted by tariffs first.

    • DismalScienceMonitor:

      “Lying Otto von Bismarck ” has taken a truculent, belligerent tone from the very beginning(including naming his dog Patton), but if Old Blood and Guts thinks the DOD (lead by a guy he so lovingly introduced as “Mad Dog,”) will take on the world with the All-Volunteer-Military (plus swarms of drones-, he is going to run into big time problems the next time he has to call out the Reserves, a la George-Bush-of the-multiple-deployments, or even re-institute the draft, for at the moment, with all the “progress” the DOD boasts, using women as fighter pilots and even passing Ranger training, it is only the men* who have to register for the draft at age 18, under penalty of 5 years in jail or $250,000 fine (they thought they were having trouble paying off their student loans!)- or BOTH. The feminists in pink will be drowned out by the men demanding, as with Title 9, they share in the joys of conscriotion as well.
      *The postcard in the mail says “Do it- it’s easy, it’s quick- it’s the law!” But the really funny part is that it clearly states it applies to aliens living here, legally, or illegally as well, and indeed this happened during ghe Vietnam War (the latter don’t get the postcard, but they are still liable for the 5 years in jail PLUS $250,000 fine: wouldn’t it be simpler to round them up and have them do their 5 years building the wall, plus bill Mexico $250,000 apiece?

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Coming Debt Reckoning
      Licking the Log American workers, as a whole, are facing a disagreeable disorder.  Their debt burdens are increasing.  Their incomes are stagnating.   There are many reasons why.  In truth, it would take several large volumes to chronicle all of them.  But when you get down to the ‘lick log’ of it all, the disorder stems from decades of technocratic intervention that have stripped away any semblance of a free functioning, self-correcting economy.   Happy...
  • How to Stick It to Your Banker, the Federal Reserve, and the Whole Doggone Fiat Money System
      Bernanke Redux Somehow, former Federal Reserve Chairman Ben Bernanke found time from his busy hedge fund advisory duties last week to tell his ex-employer how to do its job.  Namely, he recommended to his former cohorts at the Fed how much they should reduce the Fed’s balance sheet by.  In other words, he told them how to go about cleaning up his mess.   Praise the Lord! The Hero is back to tell us what to do! Why, oh why have you ever left, oh greatest central planner of all...
  • India: Why its Attempt to Go Digital Will Fail
      India Reverts to its Irrational, Tribal Normal (Part XIII) Over the three years in which Narendra Modi has been in power, his support base has continued to increase. Indian institutions — including the courts and the media — now toe his line. The President, otherwise a ceremonial rubber-stamp post, but the last obstacle keeping Modi from implementing a police state, comes up for re-election by a vote of the legislative houses in July 2017.  No one should be surprised if a Hindu...
  • The Triumph of Hope over Experience
      The Guessers Convocation On Wednesday the socialist central planning agency that has bedeviled the market economy for more than a century held one of its regular meetings.  Thereafter it informed us about its reading of the bird entrails via statement (one could call this a verbose form of groping in the dark).   Modern economic forecasting rituals.   A number of people have wondered why the Fed seems so uncommonly eager all of a sudden to keep hiking rates in spite...
  • What is the Buffet Indicator Saying About Gold?
      Chugging along in Nosebleed Territory Last Friday, both the S&P 500 and the Nasdaq composite indexes closed at record highs in the US, with the Dow Jones Industrial Average only a whisker away from its peak set in March. What has often been called the “most hated bull market in history” thus far continues  to chug along in defiance of its detractors.   Can current stock market valuations tell us something about the future trend in gold prices? Yes, they actually...
  • Moving Closer to the Precipice
      Money Supply and Credit Growth Continue to Falter The decline in the growth rate of the broad US money supply measure TMS-2 that started last November continues, but the momentum of the decline has slowed last month (TMS = “true money supply”).  The data were recently updated to the end of April, as of which the year-on-year growth rate of TMS-2 is clocking in at 6.05%, a slight decrease from the 6.12% growth rate recorded at the end of March. It remains the slowest y/y growth since...
  • The 21st Century Has Been a Big, Fat Flop
      Seeming Contradiction CACHI, ARGENTINA – Here at the Diary we have fun ridiculing the pretensions, absurdities, and hypocrisies of the ruling classes. But there is a serious side to it, too. Mockery makes us laugh. And laughing helps us wiggle free from the kudzu of fake news.   Is it real? Is it real? Is it real? Above you can see what the problem with reality is, or potentially is, in a 6-phase research undertaking that has landed its protagonist in a very disagreeable...
  • A Cloud Hangs Over the Oil Sector
      Endangered Recovery As we noted in a recent corporate debt update on occasion of the troubles Neiman-Marcus finds itself in (see “Cracks in Ponzi Finance Land”), problems are set to emerge among high-yield borrowers in the US retail sector this year. This happens just as similar problems among low-rated borrowers in the oil sector were mitigated by the rally in oil prices since early 2016. The recovery in the oil sector seems increasingly endangered though.   Too many oil...
  • Will Gold or Silver Pay the Higher Interest Rate?
      The Wrong Approach This question is no longer moot. As the world moves inexorably towards the use of metallic money, interest on gold and silver will return with it. This raises an important question. Which interest rate will be higher?   It’s instructive to explore a wrong, but popular, view. I call it the purchasing power paradigm. In this view, the value of money — its purchasing power —is 1/P (where P is the price level). Inflation is the rate of decline of...
  • Rising Oil Prices Don't Cause Inflation
      Correlation vs. Causation A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).   Gushing forth... a Union Oil Co. oil well sometime early in the 20th century   But is it valid to...
  • Silver Elevator Keeps Going Down – Precious Metals Supply and Demand
      Frexit Threat Macronized The dollar moved strongly, and is now over 25mg gold and 1.9g silver. This was a holiday-shortened week, due to the Early May bank holiday in the UK. The lateral entrant wakes up, preparing to march on, avenge the disinherited and let loose with fresh rounds of heavy philosophizing... we can't wait! [PT]   The big news as we write this, Macron beat Le Pen in the French election. We suppose this means markets can continue to do what they wanted...
  • Warnings from Mount Vesuvius
      When Mount Vesuvius Blew   “Injustice, swift, erect, and unconfin’d, Sweeps the wide earth, and tramples o’er mankind” – Homer, The Iliad   Everything was just the way it was supposed to be in Pompeii on August 24, 79 A.D.  The gods had bestowed wealth and abundance upon the inhabitants of this Roman trading town.  Things were near perfect.   Frescoes in the so-called “Villa of the Mysteries” in Pompeii, presumed to depict scenes from a...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com