The end of Socialism but not the end of Social Welfare
The United States
The United States also fails to act to reduce or moderate future budget deficits. Again, the problem is failure of the political system to reduce spending or agree on a comprehensive program to achieve budget balance.
The problem is not new. From 1930 to 2012, the federal government approved a balanced budget or a budget with a surplus of revenues over spending in successive years only twice. President Eisenhower was a fiscal conservative. He favored balanced budgets in all years without a recession, and he gave many speeches about fiscally responsible spending. President Clinton raised marginal tax rates early in his term. But he also slowed spending growth enough to run budget surpluses for several years. Budget surpluses raise expectations that future tax rates will be reduced. Investment and growth increase.
In contrast, from the beginning of the presidency of George Washington in 1789 to 1930, the federal budget had a surplus in two-thirds of the non-war years. Wartime deficits did not continue after wars. Peacetime governments reduced debt. As late as the 1920s, Secretary Andrew Mellon was able to reduce tax rates and wartime debt by running budget surpluses.
After 1930, the Great Depression followed by several wars brought increased government spending.
The size of government, measured by the ratio of federal government spending to GNP or GDP rose from three percent in 1930 to about 18 percent average for recent decades. The current administration increased spending to 25 percent of GDP. Its budgets are rejected unanimously by Congress. Unlike the early postwar budgets that included a heavy component for defense, social spending is by far the largest share of federal spending. Most of social spending is labeled “entitlement spending” suggesting (falsely) that it cannot be reduced without depriving recipients of something that is their due.
So-called “entitlements” put future budgets on an unsustainable path in the United States and many other countries. For the United States, future spending for healthcare and retirement has a present value of $70 trillion dollars or more. There is no combination of tax rates, expected growth, and reductions of other spending that permit the promised entitlements to be paid.
Why was the modest size of government in the 19th and early 20th century maintained and accepted almost everywhere? I credit two main, but related, reasons. One was the international gold standard. The other was the widespread belief that governments, like households, should balance their budget.
Persistent peacetime budget deficits were a cause for concern that a country would have to devalue against gold. The currency would move to the gold export point, requiring intervention. Intervention could succeed in stabilizing the gold exchange rate only if the market expected fiscal discipline to improve.
I have never advocated a return to the gold standard. The principal reason is that the public prefers stable domestic prices and employment to a stable exchange rate. A second reason is that a single country that fixed its exchange rate to gold would buffer shocks for all other countries by inflating and deflating when others demanded to buy or sell gold. An effective gold standard must be universal or, at least, multi-lateral.
The enduring lesson from the gold standard years is that a publicly accepted a monetary rule that maintains a stable domestic price level (or low rate of inflation) also restrains budget deficits, just as fiscal restraint supports the monetary rule. The policy that will restore growth and sustain freedom is a policy of rules. That is the policy that we must work to achieve.
Collapse of the Welfare State
After John Maynard Keynes read Hayek’s Road to Serfdom, he wrote to Hayek praising the book but disagreeing with its conclusion. Keynes claimed that if well-intentioned people made the decisions, outcome would be beneficial and desirable. This is a major flaw in the organization and operation of social democratic governments and welfare states. They presume most often that they are selfless and know better than the public what is right.
The great German philosopher, Immanuel Kant, had a better understanding of human character. He wrote: “Out of timbers so crooked as that from which man is made, nothing entirely straight can be carved.” Christian theology at the time saw humans as morally imperfect. Some exceptions can be found in all eras, but it is a mistake to rely on goodwill and good intentions. Twentieth century experience in authoritarian states and the democracies of Western Europe and India alike reminds us that “power corrupts.”
Kant’s judgment warns us that we should not expect benevolent government regulation. The rule of law directs government to treat all citizens as equal before the law. This is an ideal that guides regulation toward desirable outcomes. Like all good policies, it is a rule.
Detailed regulation often proclaims that it is done “in the public interest.” Most often it brings special privileges, crony capitalism, corruption, and circumventions. Powerful Soviet or Chinese officials had access to better opportunities, better food and healthcare than ordinary citizens. Democratic India became known for bribery and corruption of officials to obtain special privileges.
After writing the Constitution of the United States, James Madison contributed to the Federalist papers to promote ratification. He insisted that the Constitution limited the power of the federal government, and in Federalist 10, he warned about the threat posed by “factions.” Today we replace factions with interest groups. As Madison warned, interest groups protect their interests at the expense of others.
