The Clueless Occupiers from La La Land

By Son of Bastiat

“I’m not the 1 %. I’m not the 99 %. I’m me” – Vinnie, a self-made art entrepreneur

One of these days, without wishing that fate on them, an Occupier, a pedestrian, a bystander along with scores of others will have their asses kicked, heads cracked, ribs broken, limbs severed or worse, in an orgy of violence that will erupt over issues that few of them have clearly grasped, and thus have little chance to influence: economic justice, income distribution, bankers’ greed, corporate power, welfare or whatever other causes of their disempowerment. Apart from providing critical mass and excitement that liberal media love to hype, they will end up as little more than cannon fodder for clever agitators with more focused and sinister agenda, the useful fools that revolutions since time immemorial have relied on for the dirty job of capturing mass movements that just as quickly fade into egoistic fantasies.

When it happens they will experience the imperfect, unforgiving world first hand. They will learn about the millions who, just like them aspire to better lives, but the pursuit of which result in making life less than ideal for themselves and everybody else. They will meet the legions who, day after day, suffer the cruel stings of unintended consequences, their best efforts and purest intentions notwithstanding. Maybe they’ll appreciate how sordid the “human condition” is, from which their efforts to escape embroil them in all sorts of transference problems. If they’re lucky they’ll learn how the complications in their lives grow in proportion to the degree they fantasize “how the world ought to be”, rather than “seeing it as it is”. They might conclude that much of their beef about life is delusion willfully indulged.

Parsing Egalitarian Entrails

They hate it that the world is too unequal? Well, so do I, but to get anywhere, a precise definition of “inequality” is needed. Time magazine offers one aspect of it: average incomes of $ 1.5 MM and $ 50,000 for the 1 % and 99 % of all Americans respectively. But do they really think that eliminating differences between two figures is all there is to it? Sadly it isn’t, because income (or wealth) gaps hide more things than are apparent on the surface. Just ask: will dragging the 1 % down and bringing the 99 % up make things better? The answer is no, because even if the latter are numerically superior, it punishes the few “heavy lifters” and rewards lots of underperformers, with the result that society as a whole ends up less productive.

And why should productivity matter? Because in the long run, redistributions that do not ensure wealth creation end up making things worse – just look at how farmers who receive land after land reform without provisions for making them productive promptly lose them, leaving agriculture worse off than before. Instead of bringing people down it would be better to create opportunities; taking away the fruits of work of the 1 % will lead to a capital strike that reduces those opportunities. Few Occupiers realize that this nasty “come back” is what causes their joblessness.

But what if perceptions of “just” differences are frivolous or subjective? If there is no objective basis for doing it, income and wealth will be redistributed with neither the support of givers nor the gratitude of recipients. It’ll not be easy but even assuming that it can be done, keeping it there will require constant infringements on every one’s freedom or expectations, which as Machiavelli pointed out, endears the egalitarian to neither. Thus redistributions don’t last long, especially if people are free to do what they
want, from refusing to create wealth to running away from it altogether (now rampant in the US and even China) . Instead of removing inequalities, they only end up making them worse and permanent.

Voluntary redistributions via taxes are only a tad less chaotic, requiring one to reconcile peoples’ differing needs for, and respective contributions to the creation of that which is sought to be equalized. Unless everyone yields to reason or sense of moral worth, disagreement will lead to discontentment. Redistribution even with volition means that one doesn’t care how motivations and capacity to generate wealth are affected; all that matters is less inequality at whatever the consequences. Coercion can effect and maintain it, but eventually egalitarians will have to make up for what is lost in the process, with the result that the 99 % will have less income and no jobs. Such are the calculations of fantasists.

This is why the most practical distribution policy (Rawls’) aims not at full equality, but the toleration of some of it in exchange for motivating those who contribute more towards wealth creation and income generation, provided that that those at the lower end of the distribution scale are not made worse off as a result of the policy. It admits that no human society – even the most truculently egalitarian - can avoid inequality; it is a matter of how well members can tolerate it, and of where they have a better chance at rectifying it if they can’t. If that approach still creates too much inequality, blame those who formulated policies that produced such outcome, even if they did it in error; make them pay dearly for such outrage especially if they did it with malice. Just don’t redistribute wealth or income arbitrarily as not only would it fail to solve that problem, but will likely end up worsening it. To Proudhon’s “Wealth is theft” must be added: “Punish the thief, suffer the loss of what he gives you”. Even bad men do produce a lot of good.

Do You Understand the Moral Roots of Greed?

As with inequality, much depends on what “greed” exactly means and whose vice it is. Unlike inequality which is retrospective and is not an absolute requirement of growth, greed is prospective and central to the achievement of that growth. This is why greed is a double edged sword that can do a lot of good (when used by the right folks) or evil, if otherwise. What one can’t simply do is judge those who indulge in it, without inquiring as to why and what their roles are. Like inequality, perceptions about greed tend to be colored by subjective understanding of what is required in such roles. This is why folks find greed by others offensive (but not as much if done by themselves) – it’s the resentment in being excluded from the benefits especially if they don’t know whether they deserve them, or whether they can deliver what’s expected in those roles. Like inequality, greed defies analysis using subjective, overt comparisons; greed goes beyond by being self-referential, never looking at what the other side needs.

If those perceptual problems are not bad enough, one will also be held hostage by moral baggage that he acquired in the society he grew up. Philosophers have pointed out how moral judgments arise from extending beliefs outside of their proper boundaries, while psychologists link them to the mysterious operations of the subconscious, but let’s skip those because they require making shaky assumptions about the purpose and meaning of life. Let us focus on how thinking processes are affected by language and word usage, largely without individual awareness. It turns out that a lot (not all) of moral judgments flow from nothing more than beliefs shaped by personal, family, tribal and community values. A lot of moral judgments (again not all) have little to back them up save for local values (e.g., fairness, justice, etc) that a community holds as sacrosanct. To make matters worse, this error of thought is compounded by carelessness in sentence construction and meaning of words. To Vaggini errors of moral judgment result from illogical transpositions of the subject and object in certain types of sentence structures. As astonishing as that sounds, what the above claims mean is that excessive concern for greed (and also inequality) are the products of self-awareness; anything beyond that is pure, unadulterated fluff.

At any rate there is no need for these uneasy assumptions for there is a simpler explanation for the mental aberration that disposes one to view everything that does not align with his personal ideas of what is just, as greed and “therefore” immoral: the arrogant belief premised in one’s having ALL the facts needed to make a particular moral judgment. In today’s volatile and extremely complex world, that assumption betrays irrational hubris. How else to explain why, in the aftermath of the financial crisis, the sanctimonious quickly and totally blamed it on “greedy bankers” when, in light of perfect hindsight, it turns out that their legitimate roles (as a class, for particular behaviors can never be explained by any general theory) as maximizers of gains were enabled by bad regulation and politically tainted policies which relaxed origination standards and encouraged leverage in pursuit of a policy goal (mass housing).

Unlike politicians, the bankers were performing what they were trained to do, which is to generate profits within silo-like environments that were bereft of sufficient information and understanding, thus amplifying unknown events occurring elsewhere. Save for a prescient few who “boasted” of being right early on, the character and severity of the crisis was generally not foreseeable even by economists who lacked market insights and experience to predict it, let alone prove conclusively that an emergent system could not “right” itself, especially that what finally pushed the system over the cliff are not these mistakes but the flawed decisions of the system’s liquidity managers who erred in dealing with, what else, a no-precedent crisis. Folks who blame greed for the crisis sans any qualifiers (e.g., errors of judgment or irresponsible behavior under complexity), are at best being naïve about human behavior in dynamic systems; at worst they are romanticists who can’t psychologically cope with uncomfortable causes for events that they can’t mentally grasp, so they default to the easier search for demons to exorcise. The fact that conflicted “greed”, if properly harnessed is vital to wealth and job creation should caution those inclined towards simplistic judgments, to ponder the risks of demonizing a vital part of economic life. An inability to entertain two opposed ideas without hiding psychic baggage is a sign of a weak, delusional mind ever seeking relief in transference. Moral outrage is a sop to a guilty conscience.

The Dilemmas of Corporations and the Welfare State

Let’s go right to the heart of issues that protesters are correct to raise even if they can’t quite articulate them well: the legitimacy of Corporations because of the unprecedented powers they have amassed, both outside the sphere of market operations and in their ability to corrupt society through their strong influence over the political process. Who in his or her right mind would question such motive, but it is also true that such ideal goals involve tradeoffs at a stiff price. But if that isn’t bad yet, Occupiers compound their woes by thinking that a non-market solution – the welfare state – can solve the problems they decry, namely slow economic and job growth. Like democracy, the corporation is far from being an ideal solution, save all other alternatives are worse – their tradeoffs are more expensive.

A little history should remind one that the modern corporation is a recent phenomenon, a caricature of the weak entity that it was in the last years of the 19th century or even up to the early years of the 20th. Massive needs for capital by technology, the imperative to diversify markets for stability of growth, and the centralization of authority to deal with efficiency issues and control the resulting complexity – all these led to the amassing of power (and thus its abuse) by those who lead these organizations. That most of them were self-appointed and not responsible to society or even to the corporation’s owners (who got castrated in the process) is not their fault; say what you want about the Law’s failure to come up with the proper legal safeguards or about regulators’ duties to properly enforce the rulings, the fact is that the corporation is the suboptimal solution that has successfully delivered on two of society’s most critical survival desiderata – employing the hundreds of thousands of its members who must earn a living at the least expenditure of time, money and effort; and effecting the efficient conversion of resources into sustainable growth. That many corporations have failed these tests or thwarted their attainment is no reason to reject all of them, unless one is sure that he has a superior alternative.

As one scans the landscape, he finds that few of those are worthwhile candidates to replace it. For the criteria boils down to what extent those vehicles’ decisions can take place within the influence of market discipline, especially as they undertake decisions that have non-market ramifications and “external” influences, such as is the character of social decisions today. The problem is that the boundaries delineating these decisions are booby-trapped with unknown costs and outcomes, which sets this back to the old nemesis, unanticipated consequences. Folks of a disposition akin to those we have met above – a moral repugnance for any inequality and the slightest hint of (unqualified) greed, prefer that non-market solutions predominate. What they claim little or no awareness of (or if they do, are uncomfortable to admit), is that such alternatives involve an explicit if seldom acknowledged tradeoff between two opposed ways of thinking about modern society: a market-responsive one typified by corporations (economically successful but rapacious if uncontrolled) and a non-market driven welfare state (inefficient, wasteful, unsustainable), its only tested alternative. The harsh reality is that one can only choose between two, imperfect solutions, but one of which tends to make the outcomes worse.

None of this defends (let alone excuses) the modern corporation’s hideous handiwork in vital concerns as environmental degradation, unsustainable exploitation of natural reserves, manufacture and exports of death-dealing weapons or drugs, aggressive lobbying to influence regulatory and electoral outcomes, all the way to outsourcing jobs that have no logic other than maintaining “competitive presence”. On the other hand, one has the welfare state, ostensibly set up to take care of those with neither the means nor the knowledge to protect themselves against the vagaries of nature or the rapacity of the markets. What it achieved instead was to siphon the resources that could have been used to get the economy to grow faster in order to lift those at the bottom of the social pyramid, which it diverted to politicians, bureaucrats and parties such as labor unions, with interests vested in perpetuating inefficiency and the sense of entitlements that resisted all reforms that threatened their hold over votes and sources of patronage. It is supreme irony the real threat to the world economy today comes not from the much excoriated “corporate greed” but from explosive public debt, a legacy of the welfare state. In matters that affect society the most – jobs and economic security- the corporate economy, warts and all, trumps the welfare state. To want to kill it while growing the welfare state is not only ludicrous but inane.

Hence the question is: what are Occupiers’ beef against corporations, and why their quixotic preference for such losers as the inept, inefficient and stodgy welfare state to deliver what is important to society? Could it be that the reason they condemn the corporate economy and praise the welfare state is that
they are psychologically insecure with competing in the marketplace where they can get their asses kicked in spite of a (academically indulged) pretense that they’re good. Well one is not THAT good if he must seek solace for his wounds from the womb-like comforts of a nanny, which the welfare state is. The tragedy is that Occupiers do not see that they are ditching imperfect solutions that work in favor of worse ones that have failed miserably, as close to the definition of delusion as one can have.

What Their Real Problem Is: Externalizing Inner Failures

Three years ago a young man asked to talk to me one on one. Thinking that it had to do with his long put off marriage plans, I braced for some unanticipated news: an unplanned wedding, or worse a split. As soon as he sat down gravely on the couch, I sensed that this was a devastating issue, and indeed it was: his job would not be renewed the very next year when he and his fiancé had planned to finally marry. I sat down silently as I listened to him detail the reason for the painful news: that despite being a talented art teacher, well-liked by peers and adored by his students, the artist in him just was not up to the administrative and routine demands of the job. As I observed his face turn grim and his eyes shed tears of anger, frustration and fear, I fought hard to explain and reassure him that being fired was not the end of the world; how I, too, once faced such a disaster, which I overcame by acquiring more expertise than my “firers”, which facilitated my foray into opportunities far beyond what I could find working for others. After going through this human moment we knew that there were serious things we had to do; none of those was about blaming our immigrant fates or the society that gave us our breaks. It was all about coping with life’s challenges as best as we can, as they unfolded in all of their stark harshness.

I wasn’t expecting to see how such an experience could be improved upon and surpassed by this young man who rose above this depressing episode, so well that in the span of less than three years, with a little less than a thousand dollars in seed money, he built a business that his peers now rate highly as an upcoming global sports art licensing and branding business, with fans from all corners of the world so rabid as to tattoo his art work on their bodies. Recently he capped this feat by co-branding and licensing his products to, and partnering as creative designer for, a leading US apparel firm that sells to 1,400 outlets. Looking at it now his dramatic turnaround owed mostly to personal discipline, adhesive-like perseverance, a refusal to get overwhelmed by lots of handicaps (we are outsiders), and a can-do spirit that drives him to excel amidst all odds. Instead of ending up as a loser he turned himself into a self-made entrepreneur who neither gave up nor depends on others for support, refusing to externalize his problems by blaming America for his share of life’s trials. Recently we had occasion to watch a rowdy O.W.S rally blaming the 1 % for their problems, and here is what he said: “I’m not the 1 %. I’m not the 99 %. I’m me, doing what I can to change the world”. I copyrighted and used it as the idea for this essay.

Other than the fact that terribly misguided can be useful in waking up society’s often moribund senses, there is not an iota of logic or fact to back up the O.W.S. positions, no matter how well meant and sincerely they are held. This is why they cannot come up with concrete proposals, and why they prefer to wallow in ambiguities, fearing that taking positions will force them to confront extremely painful realities, not the least being their conflicted inner selves. Why risk the embarrassment of a firm position when in vagueness one can indulge the airs of moral superiority? Could it be that this phenomenon called O.W.S. is the escapism of a bunch of badly raised losers who have succumbed to life’s vicissitudes and blamed America for their misfortunes?

Instead of wasting energy occupying idle real estate, why not build something concrete and useful on top of it?

Is Warren Buffett Smart?

By Son of Bastiat

“Financial genius is before the Fall” - John Kenneth Galbraith

Almost by universal acclaim, the answer would have to be a resounding Yes! For how else would it be responded to except affirmatively, based on what “popular wisdom” knows and says about the man:

a.  The world’s second or third wealthiest man (only Slim and Gates are wealthier according to Forbes). Better yet he found his way there through patient value digging, not market rigging

b.  A lot of this wealth is in liquid form, being shares in large, established publicly traded companies

c.  Unlike Gates or Slim whose wealth are tied up in narrow sectors (telecom, software) Buffett’s wealth is diversified across sectors that the first two wealthiest men can only dream of.

So, from the narrow standpoint of investment quality, Buffet is not only smart but astute in ways that the other two aren’t. The real question is: How does his “smartness” fair outside of this narrow area?

Probably Not As Smart As Supposed

We’re not talking about his stock picking abilities which based on his mistakes in later years have not been as legendary or exceptional as the ten baggers (like Coke, W. Post or Geico) of his early years in the stock market. We are also not referring to his mediocre currency derivative bets that turned out poorly (disclosed in the Annual B-H Shareholders’ Letter) that luckily got offset by spectacular stock futures option trades (from hedge fund gossip) which tells those who know how these markets work, that his prowess is now based more on selecting the right stock options traders and managers than any innate value creating abilities unlike during his early stock picking career. In fairness to the man, he eschews esoteric investment ideas beyond the OPT so he does not invest and hence eats the kind of losses that reckless hedge fund traders do with loads of chutzpah. This Graham disciple remains so today despite the fact that very volatile markets are not kind to value investors.

No, we are here talking about the fact that outside of his stock-picking (and manager’s selecting) skills, the man is a complete novice, if not a dodo in the larger economic environment of which investing is a tiny part. This is based on only one, but a very central aspect of that reality, the question of what taxes ought to be paid by people like him. As explained below, it reveals a lot about whether his smarts are innate or merely of the acquired kind. None of this is to denigrate businessmen the way enemies do.

The First signs of Cluelessness

Buffett has for years been quoted as saying that the rich are getting off from their obligation to pay a fairer share of the nation’s tax burden. Last July 7, in a series of interviews that the liberal media quickly picked up and disseminated (for a reason), he said that “I think the rich have a responsibility to pay higher taxes” followed by a statement that his wealthy friends “are paying lower taxes than the people who are serving the food” after an earlier disclosure that his personal tax rate was a mere 17.7 % compared to that of his receptionist of 30 %.

All these populist sounding nonsense fitted in so well with one of the left’s most durable and cherished myths, which is a war among classes, down to the fact that they are mostly wrong:

a.  Effective Tax Rates. From 2008 data supplied by the IRS itself, the share of Federal taxes in household income after deductions and exemptions amounted to 23.3 % for the top 1 % of all household income earners (above $ 380,000); 19 % for the top 10 % of household income earners (above 114,000); and 22.7 % for the top 0.1 % of household income earners ($ 2 MM and above). Contrast this with the 4 % paid by median income households ($ 35,000 and above), or the high, negative effective taxes paid by almost 60 % of all households who either receive incomes too low to be taxed, and/or receive some form of public assistance and entitlement. Talk about equity.

b.  Total Federal Tax Rates. Based on CBO data, the share of total Federal taxes (not just on income but on Social Security and Medicare payroll taxes) paid by middle class families ($ 34-50 thousand bracket) was 14.3 % of income, versus the 27.9 % and 29.5 % paid by the top 1 % and 5 % of all tax payers. Or the 32 % of all Federal taxes paid by the highest income earners. The reader is invited to calculate Gini concentration coefficients to show that these tax rates are indeed progressive.

c.  Effective Tax Rates After Considering the Source. In a 2010 IRS limited study of the taxes paid by a sample of 400 of the nation’s richest personal tax payers, the effective share of taxes to reported- income came to about 18 %. This is the study that Buffett probably referred to, as he would most likely have been one of those 400. Except that most if not all of these tax payers derived their income from investments, meaning that they reported incomes that had been taxed twice, either at the level of dividends (35 % on ordinary income) and capital gains (15 %) for a total tax burden closer to 45 % and not the 18 % that came out from the simplistic division of two numbers. Quite definitely not the level of expertise expected from a seasoned financial analyst like Buffett.

d.  Shelters, Loopholes and Tax Base Reduction Gimmicks. Buffett’s claims would have been more morally defensible had he eschewed the usual gimmicks used by the wealthy to reduce their basis and not just the incomes they were free to report (or defer to a lower tax rate phase in their lives as is commonly done). Buffett is being facetious in comparing his after tax position vis a vis the middle income classes for three reasons: as a wealthy tax payer he is able to take advantage of the tax shielding allowed on donations to charitable causes; he is able to effectively reduce his taxable base by booking most of his income as “carried interest” 20 % of which he can later pay taxes on under a favorable 15 %; and most outrageously of all, with the bulk of his assets already donated to a foundation, he is able to shield them from the high taxes during distribution. These tax preferences for the wealthy the middle income classes can only drool of, but which of course Buffett neither mentions in the same interviews, nor corrects on his own, if he was that convinced of its injustice, by just quietly writing a check for the underpayment towards the right tax amount.

More Evidence of Poor Smarts

If Mr. Buffett was really that smart (not just an astute investor and businessman) he would have figured out in ten minutes why a tax policy based on such idiosyncratic assumptions (ie, provided they were empirically right, which they aren’t), would eventually to the destruction of the very wealth that he along with millions of entrepreneurs labored so hard to create:

a.  Taxes have behavioral, not just fiscal impacts as any simpleton understands. Regional tax data reveal that states with low taxes attract rich and even middle income tax payers away from the high tax states and indeed explains the erosion in tax bases of such states as California and Wisconsin and the surge in tax receipts in tax advantaged states like Texas and Florida

b.  Ditto, but with even worse consequences when US wide data about rich tax filers are taken to consideration. In a study recently released by the IRS, it was found out that the number of rich tax filers shrunk 39 % between 2009 and 2010, representing a 42 % decline in tax receipts over the same period. The favorite explanation is of course the recession, but the really “smart” folks know the true reason, unfortunately they will be apocryphal tales for now until proven otherwise.

c.  Not just that “billionaires and millionaires” ceased to exist, but that those who stayed put in their respective domiciles, apparently indulged in less economically rewarding activities just exactly as predicted by the famous Laffer Curve (a backward looping effort vs. tax rate curve posited by the Chicago economist A. Laffer). A sample of b respondents should easily verify this. These data are not harbingers of the business climate that nurture future successes like him unless he wants it.

Given this obvious conclusion, Buffett’s plea to be assessed a higher tax can’t be viewed any other way than that he is not being smart. As far as can be seen, he is not an ideologue, or a Democratic partisan, and because he is too mature to play the sort of political games indulged in by folks like Obama, he must be pretty dumb to entertain and spouse these views. Ironically it was Galbraith, a liberal economist, who said that smart (finance) people tend to get dumb before they fall. Could he been thinking of W. Buffett?

Concluding Comments

Which brings us to the core question: Why is the liberal class making hay out of these nonsensical ideas (which they have to be dumb to even consider, unless they haul their worn out pleas for fairness-at-all costs)? The answer, once again, is simply this: by shaming the rich into agreeing to pay a higher fraction of their incomes, the path is clear to coercing the middle classes into paying higher taxes.

The fact is that 3.2 million middle income households earning above $ 200,000 paid $434 billion in 2009 taxes, the rich revenue lode that liberals like Obama, checkmated in their borrowing plans by conservatives have been eyeing to grab at all costs. Read that again: At All Costs, meaning, no matter if these folks will flee and take jobs along with them, and regardless of whether the outcome is fair as they like to loudly proclaim.

It is the very imbecility of this idea that has turned off the author from the liberal agenda, realizing that what they are about is mostly Big Government programs that everywhere has bankrupted countries and states.

None of these excuse Americans from having to pay higher taxes eventually, if only because of the mistakes committed by the politicians they have elected previously. But such policy decisions have to be done smartly, or else automatically (like what the author has advocated along the lines of Miller’s The 2 % Solution idea wherein a set portion of the nation’s output is set aside from welfare and social spending) to eliminate these kinds of politically abhorrent decisions that turn folks like Buffett into big disappointments especially in their twilight years. [Copyrights: The Son of Bastiat, VRR@NYC2011]  

The Requiem for the Welfare State

By Son of Bastiat
 

“When great evils happen, I am in the habit of looking out for what good may arise from them as consolations to us; and Providence has in fact established the order of things so that most evils are the means of producing some good” by Thomas Jefferson

Events of the past few days are rattling not just a few individuals, among them being those who worry about what the markets may be signaling about their job prospects (most recent graduates); the 50 or more million senior citizens who depend on (fixed) pensions and nothing else for their daily survival; and most heartbreakingly, the 15 or so million “lost” children, many of whom are orphans who have fallen back into the maws of poverty, innocent casualties of the on-going recession with nobody else to turn to for succor. These are the true victims of a welfare state that is in its last death throes; those who are tempted to think of the gyrating and plummeting indexes as ‘comeuppance” for rich folks’ unmitigated greed, need to be reminded that those lines are merely the visible images of the deep seated fears and anxieties of millions of ordinary folks who are getting caught in this visceral contest of ideas. The markets may rebound but the pains and sorrows will remain with these folks throughout their lifetimes.

That these cathartic events are still viewed with shock (and alarm) as if they were totally unexpected, as if there was any outcome other than what is now unfolding, is the outrage behind these. One detects it from what the politicians of the left and right are saying, but since lying and prevaricating is what all of them do in order to remain in power, they cannot be expected to say anything else. One would expect better from the media, but instead they have become purveyors of silliness and inanity, blaming the very messengers (but not the message) they should have welcomed if they were true advocates of what’s good for society. Caught on the wrong side at exactly the moment when history turned against the welfare state, but too proud to recant the nonsense they have been peddling lest they get exposed for incompetence and bias, they are now unable to execute an honorable retreat and thus have to engage in name calling and blaming their fallen idols who were just as clueless about what’s going on.

What, it may be asked, was so ineluctable with the fall of the welfare state (which stands for a society that depends on government assistance for much of its own survival)? The only true and honest (if politically incorrect) answer is that it was never meant to function as the safety net for the poor that social theorists and welfare advocates have romanticized for it. The welfare state which in his cold, calculating fashion the Prussian Chancellor Otto von Bismarck created back in the mid-1880s to win the hearts and minds of industrial workers in a bid to preempt his political opponents (the Socialists) from thwarting his ambitious schemes to unify Europe under the Northern German alliance, became the grandiose solution to a problem that did not then exist (at least not in Germany) or if it did, should have required more careful thought. From its creation and up to now the welfare state has been used to secure power, and like all flawed births, their midwives will never grasp the depravity of their creation.

With the advent of the Progressive Era the passage of social legislation increased the heavy hand of government in the welfare state. A State heavily involved in social reform is neither foreordained nor the only option available to society in caring for its less fortunate. In the Europe of the late 19^th C. and America of the early 20^th C. private beneficence and charitable institutions took up most of the burden of caring for the poor. It is strange to read how, during the Guilded Age, the sick poor in America were cared for in private hospitals supported largely by wealthy families and religious houses just like it was during the medieval ages. Only when politicians realized the huge vote drawing power of limitless government largesse did the State become the principal provider of welfare assistance. Not surprisingly, this period also saw the expansion of government, and inevitably the first time that income taxes were levied in American history. Even Bismarck would have been appalled at what became of his handiwork.

The design of the welfare state unfortunately collides with three harsh realities. One is that social spending which is unrestrained by limits and accountabilities eventually turn into a state of commons beset by a tendency to spin out of control. A second is that benefits too generously dispensed create and nourish a culture of entitlement and dependence that view attempts at reform as “unfair, mean-spirited and unjust” which effectively prevents self-correction. Because they make up such a huge vote rich constituency that politicians dare not ignore, these programs just keep growing regardless of constraints elsewhere. The last is that the welfare society is a resource consuming sector, dependent on the productive one for sustenance. Expanding welfare faster than the productive sector saps the latter of resources it needs to grow; worse, extracting the wherewithal through coercive taxes and regulations tend to impair the latter’s health. 

The welfare economy’s unsustainability would have become a reality over time but three forces that came in with the 20^th Century accelerated its demise:

a). Internet and Web Technologies. These technologies leveled the playing field that used to be heavily dominated by big entities with capital, information and contacts. When opportunities can be found at the touch of a key, options multiply and the advantages and coercive policies quickly fade into nothing.

b). Globalization. When factors of production like knowhow and capital are free to move anywhere they are welcome, economic differences disappear, equilibrating towards the Law of One Price. There is no reason for US (or European) workers to be paid $ 45 per hour excluding benefits to do what laborers in emerging countries can do for a fifth of it, daily. Suddenly the rationale for a safety net is blown away.

c). Erosion of Work Ethic and Moral Values. There is no sense in denying what right thinking individuals have known but somehow glossed over for fear of being viewed as “woozy”: that societal deterioration usually follows a decline in its moral values. This is a view that is now finding confirmation in European and US work ethics that in part explains such dysfunctions as Medicare overuse and the housing crash.

When things as earth shaking as these do not register in the consciousness of a society and its leaders, the stage is pretty much set for a dramatic fall, usually after a series of warnings. One such warning was the crisis of 2008 which can be viewed as the denouement of a secular tendency towards economic volatility first manifested during the oil crisis of 1973. Another recent warning that has longer roots is the current debt crisis, a direct effect of the unsustainability of big public spending that began during the Great Society and New Frontier Eras and peaked with Obama. Soon the world will see the onset of the Great Contraction, itself a reprise of the Great Crash of 1930s. One would think that the politicians and thought leaders would have detected these warning signs and “connected the dots” especially in the wake of the Nov. 2010 elections which telegraphed that ordinary folks wanted a reset because the political economy was on an unsustainable path. Despite all these, how did they react to the recent crash that followed the US credit rating downgrade? Derision, name calling and blame gaming, with the odium reserved for groups that brought to the fore serious problems that nobody dared to raise.

None of this leaves conservatives off the hook. For their lack of sufficient social conscience and obsession with materialism, they have been just as guilty in exacerbating the social malaise that supplied liberals with the ammunition and passion to press for unbridled government spending. Most of their assistance comes in the form of superficial rather than meaningful programs to help the poor. But being the more pragmatic of the two camps, conservatives would, if they were incentivized, be more capable of helping at a scale and variety needed by the poor, with none of the liberals’ moral delusions and politicians’ manipulative-ness. By factoring in the cost of supporting social spending in their investment calculations, they can do a better job of designing sustainable welfare programs that run efficiently and without coercion, though this would still leave giving at their discretion, perhaps the price of freedom. The ideal is for such programs to be set at a percentage of economic benefits, in advance and automatically built in as a deliberate policy to support the poor. 

Until the revision of the economic structure takes place, the overriding problem of our times is how to help the poor without smothering their spirit and turning off that spark of innovation that makes charity a pleasant obligation to face instead of a burden to be evaded or imposed by fiat. Unless this is achieved, as Jefferson says in his quote, man has to suffer tremendously to figure out a reasonable way to do it. [VRR@NYC2011]