November 13, 2010
America at the Crossroads: Whither Capitalism?By John Griffing
Throughout history, the rise and fall of nations reflects an increase in decadence without a proportionate increase in economic resources. The resulting unsustainable levels of debt lead to economic bankruptcy.
Old proverbs place great weight on the economic significance of debt, e.g., "The borrower is servant to the lender." But after nearly a century of U.S.-driven global prosperity based in mountainous debt, general comprehension of debt and its effects is sorely lacking. As evidenced by the surge in national debt and unfunded federal liabilities, it would seem that Americans are deaf to formerly revered principles, mainly because the lender has so far been content with American promises to pay at some future date.
But even the richest nation cannot indefinitely play the fiddle with public finances without a destructive increase in taxation or loss of sovereignty. In point of fact, China has demanded control over American public infrastructure as a condition of future loans. The U.S. is already living on borrowed time.
If a nation continues to amass debt in the present in exchange for economic devastation in the future, the result will be the effective destruction of the free-market system. This is because welfare states rarely grow smaller, but they are prone to constant expansion. Greece is a current example of this principle. The more people there are dependent on government for health care, pensions, employment, etc., the fewer people in the private sector there are to generate taxable income.
And without taxable income, economies must either revert to pure capitalism or become communist. America faces such a choice in the very near future.
As the great philosopher Lord Woodhouselee once wrote,
Debt creates a vicious cycle of economic destruction that leads to systemic instability. As debt increases, taxes must increase to levels at which businesses cannot operate. And if businesses cannot operate, businesses cannot hire, and if businesses cannot hire, consumers cannot buy goods and services. The present crisis is no exception: new hidden taxes and new entitlement programs have scared investors, creating an economic vacuum. In the absence of private enterprise, government usually steps into the vacuum. But since government largesse depends on the existence of a taxable base -- consumers and businesses -- the length of time during which government can fill the vacuum will necessarily be limited and dependent on more debt. Government must have something to tax.
That is why socialist paradises like Sweden have begun to pursue tax cuts and general free-market reform. With taxes exceeding half of personal and corporate income, Sweden could no longer raise the revenues necessary to maintain coveted social services, since there were fewer sources of revenue to tax. Instead of adopting the failed communist model, Sweden realized the importance of business and the unsustainability of ballooning social spending and corrected course.
France too has faced similar choices, opting for reductions in wealth transfers and cuts in basic government services.
Like Sweden and France, but on a much larger scale, the United States faces possible alienation of business instead of desired economic recovery. Under the Obama administration, America has attempted to fill the current vacuum with stimulus spending and temporary employment schemes. The problem? Government spending cannot stimulate the economy. In fact, government spending takes money out of the economy. Government debt takes future dollars out of the economy. What dollars do make it into the hands of citizens can provide only temporary economic relief, since government-generated economic activity transfers existing wealth instead of creating additional wealth. By taking money from employers, government prolongs unemployment, delaying true recovery.
Government created a few "shovel-ready" Census jobs in 2010, jobs that were gone as soon as they were created. How many real jobs could the private sector have created with the $800 billion in failed stimulus spending? Bottom line: Government cannot stimulate the economy, but government can create the conditions for genuine economic prosperity.
Instead of taking money from ailing businesses and creating "shovel-ready" jobs, government should provide market-friendly incentives that encourage businesses to hire.
The outdated Keynesian economic approach clearly favored by the Obama administration -- i.e., attempting to increase aggregate demand in the absence of consumer spending with government spending and high taxes -- is based on a flawed assumption: namely, that recessions are bad and must be prevented. To the contrary, recessions have been taking place for hundreds of years and are the hallmark of a healthy capitalist society. Seasonal unemployment rises, and inefficient businesses with unsold inventories fail. In effect, recessions serve to eliminate fat and rejuvenate profitable industries.
Economic chaos must run its course from time to time. The 1921 depression lasted no more than a year, followed by the "Roaring Twenties," an age of untold prosperity. Government did nothing and stood aside as business did everything. Conversely, the Great Depression lasted nearly a decade, prolonged by government programs intended to help alleviate suffering but instead acting to prevent natural recovery.
When government replaces industry, often taking the form of subsidies or, in extreme cases, nationalization, it displaces private sector initiative, which diminishes income, productivity, and efficiency -- all the benefits of capitalism. At its peak, the Soviet Union was plagued with gross inefficiency. Lines for bread, shoes, and other essentials were a daily factor in the lives of Russian citizens. Central planning committees attempted the impossible task of determining what people needed and in what quantities. Similarly, the new Obama-inspired Consumer Financial Protection Agency (CFPA) claims the ability to "behaviorally inform" consumers.
Such a system cannot reflect the needs of human beings. Only prices -- a characteristic of free markets -- can do that. Demand drives resource distribution and supply, creating perfect market equilibrium in the form of a price. No other system tried can claim such a track record of tested success.
As Winston Churchill once said of democracy, "Democracy is the worst system of government, except for all others tried." The same could be said of capitalism. Capitalism, although imperfect, maximizes the benefit of the many. Other systems -- e.g., communism -- rely on committees of self-appointed economic masters determining need, which demonstrably results in unprecedented misery and poverty, except for the select few.
America is at a crossroads. Current trends are not sustainable. Rampant entitlement spending without basis in economic reality cannot endure indefinitely. Either America will revert to tried-and-tested free market principles, or communism, perhaps under a different name, will out of necessity replace capitalism as the dominant American economic paradigm.
America must make a choice. Welfare states driven by debt have immediate results but-long term consequences. Free markets have delayed benefits but offer long-term economic security.
If America is to remain an economic superpower, it must value the future over the present.