Freeloading, Welfare and the Rich

For any human society--for any social animal--the big issue is freeloading.  The biggest threat to social solidarity is free-ridership.

At one level, we are all free riders.  We all benefit from society way beyond our contribution.  Even a chap like the late Steve Jobs could not bring forth his consumer-electronic trinkets without the rest of society.   After all, what did he know about solid-state physics, computer processor design, software design, touch display technology?  The brilliance of Steve Jobs was his ability to put things together: as in entrepreneur.

Despite the huge benefit each of us obtains from our membership in  society, we humans are quick to accuse the other chap of freeloading.  Lefties accuse the rich of "exploiting" the poor.  Union members accuse the bosses of screwing the working man.  Righties tell the poor to "get a job."  And President Obama wants the rich to "pay their fair share."

Obviously, we all care deeply about free riding.  The question is: what do we do about it?  Here, as usual, we turn to Michael Novak and his Gaulian division of society into three parts: political, economic, and moral-cultural.

We can attack the free-rider problem politically, by using force.  If we want to do that then we assign the politicians to do the job.  Government is force, and politics is power.  Politicians will gladly go after the rich and make them pay more taxes.  But the problem with that is that the politicians will also listen to the would-be crony capitalist that comes bearing political contributions.  And the politicians aren't all that smart.  They will find, in a crisis, that all kinds of institutions are "too big to fail" and that in the present emergency they must free ride on the rest of society.  You could also ask the politicians to tell the poor "to get a job."  We did that back in the 1990s when President Clinton signed the welfare reform bill that reformed one of the 79 federal welfare programs.  But many people disapprove.  They call welfare reform "balancing the budget on the backs of the poor."

If you don't like force, there is an alternative.  You can shame the freeloaders.  According to Nicholas Wade in The Faith Instinct, this is what religion is all about.  Policing freeloaders is a costly business, and you make people mad because nobody likes being bullied around and told to pay more taxes or get a job.  So you discover that, in addition to the usual earthly policemen there is a divine police force that is willing to catch the freeloaders and make them pay.  Even if the freeloader gets away with it throughout his earthly life, the gods will make him pay in the next life.  It's a cunning system, but it requires a proper socialization in childhood to inculcate the idea of divine justice.

Another way to deal with free riding is to let the economic sector worry about it.  The economic sector works like this.  If you think that Joe over there is a free rider, you don't deal with him.  You don't hire him.  You don't work for him.  You don't buy from him.  There is a certain elegance in this approach.  It doesn't require force.  It doesn't require a government program.  It doesn't even require public shaming.  It's just a private thing.  You say to yourself: "I don't like the cut of that fellow's jib."  And that is that.

Let us do a bit of reckless simplifying and tell a story of freeloading down the ages.  In the hunter-gatherer age, the dominant response to freeloading was religion.  It was appropriate because force was expensive and created blood feuds, and because communities were small enough that an individual couldn't really decide that another individual was a bad apple and refuse to deal with him.

In the agricultural age there was an increase in the use of force, because the political elite was rich enough to afford an army.  But still, the idea of divine justice was very strong.

In our age we have reduced sharply the use of divine justice to curb freeloading.  In response the political sector has stepped up its enforcement against freeloading.  Unfortunately, as we saw above, there is a lot of disagreement about who the freeloaders are. It isn't me, it isn't thee; it's probably that guy behind the tree.  The modern age has also seen a big increase in the regulation of freeloading by the economic sector.  Arguments over freeloading create division in society.  So modern man has expanded the economic approach to freeloading.

The loosening of social ties and the breakdown of the local extended family in the modern age means that you can choose who you will deal with.  You can even refuse to deal with a family member, and it isn't the end of the world.  Control of freeloading by refusal to deal works.  People who try to cheat other people are likely to suffer a reduction in income, and therefore pay a penalty for their freeloading.

Many people have tried to revive the divine justice approach to freeloading, especially our environmental friends.  They urge us to "save the planet" by recycling and by reducing our carbon footprints.

When you look at freeloading this way, one thing comes out very strongly.  We have a wonderful solution to the freeloading problem in our market system economy, but nobody gives it any credit.  Attack freeloading with government force, and you create division in society because everyone disagrees about who the real culprits are.  Attack freeloading with religion, and you must face the problem that in recent centuries the belief in divine justice has declined.  Even among believers there is more belief in a loving, forgiving God than a stern divine patriarch.

The obvious choice is to let the people be the judge of freeloading in their own lives.  If they make a mistake, and refuse to deal with a guy who really does contribute to society they are only hurting themselves.

But that would be too easy, and not as much fun as a public humiliation of the evil doers.

A National Conversation about Debt

With the European project flushing down the toilet, I think it is time for a national conversation about debt.



This is hard, and you know why.  It is hard because of a trait that our liberal friends share with Harvard men.  You can always tell a liberal, but you can't tell her anything.  Liberalism is a religious cult, rather like Harvard.  It is a closed system, and is almost impervious to persuasion.



My point is this.  I can understand having a debt crisis when the nation's existence is at stake, when we have to strip the nation of assets in order to feed its armies fighting against the Nazis or the Commies.  But should we really be facing a debt meltdown over paying grannie's Medicare?



Everyone wants to make grannie's golden years a comfort to her.  But what happens when grannie's Medicare/Medicaid takes 12 percent of GDP?



It seems to be a good idea to mortgage the whole nation if an earthquake had leveled San Francisco.  That is what government is for, to rally us all after a crisis, and help pay for the trillion dollars needed to rebuild.  But should we bankrupt the nation on multigenerational welfare?



The great advantage of keeping the national debt down to about 10 to 15 percent of GDP is that it means that the nation is ready to assume any extraordinary burden that comes along, whether it is a war to defend democracy or a natural disaster.  When it is up at 100 percent like it is now, then the nation is not ready to assume extraordinary burdens.  It already has enough burden shouldering today's debt.



Don't get me wrong.  I think that pensions are a great idea.  Health care is a wonder.  But people value these things enough to do them without the government.  Of course, after 70 years of Social Security and 40 years of Medicare many Americans can't imagine life without them.  But we'd find a way if the government went broke.  In fact, I'll bet my nickel that the aftermath of a government default would see wonders of invention: oldsters like me figuring out how to make a buck, physicians figuring out how to deliver health care to people that had to pay for health care with their own money.



And there is the societal aspect to consider.  Most ordinary people derive their most satisfaction in meeting the routine challenges of life.  In today's welfare state only the educated elite gets to meet challenges.  Everyone else just sits around telling victim stories and waiting for the handout.  No wonder we learn that, e.g., young people are curiously diffident these days.   Nobody is challenging them.



Of course, there is a bigger problem with the welfare state than just debt.  It is the demographic problem, that welfare state people don't get married and don't have children, as in Germany and Italy, and Spain.  Here in America conservatives have about 50 percent more children than liberals.  That is an existential disaster that, so far, is not suitable for polite conversation and a national conversation.



So when we look at the national government budget for 2011, courtesy of usgovernmentspending,com:

Government Pensions	$1.0 trillion
Government Health Care	$1.1 trillion
Government Education	$0.9 trillion
National Defense	$0.9 trillion
Government Welfare	$0.6 trillion
All Other Spending	$1.6 trillion
Total Government Spending	$6.0 trillion

You have to ask: Wouldn't most of this stuff be done better if the American people did it themselves?  We wouldn't do it alone, of course, but in revived voluntary collective associations, first reported by Tocqueville to the world in the 1830s.



And in that national conversation about this, let us ask a difficult question, appropriate for national conversations.  Is America ready to discuss the fact that it's all welfare, all $3.6 trillion of Social Security, Medicare, Medicaid and Temporary Assistance to Needy Families and on and on?



Imagine an America in which all these functions were being done in a vigorous, can-do American spirit.  Bureaucrats need not apply.

Let's Have a Class War

Our Occupy friends want to string up the bankers.  I see their point.  The bankers do seem to have screwed things up pretty badly.



But if you want any street cred as a conspiracy theorist you really need to be able to see behind the guy who is saying "pay no attention to that man behind the curtain."



The power of bankers is limited.  They do the bidding of the central bankers.  And the central bankers do the bidding of the politicians.  This is true even of the best financial system, the "Dutch finance" of the old Dutch Republic, the Bank of England prior to World War I, the financial system of Alexander Hamilton and J.P. Morgan.  The government sets the tune.



It's the same with the corporate chieftains.  As ruthless as they may be, they are under the thumb of the politicians.  After all, who has the guns?  Who pays tribute with political contributions?  Who pays taxes?  Who gets to hand out subsidies of Other Peoples' Money?



When we talk about the one percent, we need to think clearly.  Who are the guys with the power?  Sorry Charlie, it's not the Wall Street bankers.  They have power because they serve the interests of the political elite.  It's not the corporate CEOs.  They have power because they sell good products or, in their crony capitalist version, because they suck up to the right politicians.



If we are going to have a class war in this country, let it at least be between the people and the powerful, not the people and the toadies.  The powerful today are the folks in the permanent educated elite, the New Class of top academicians, journalists, activists, politicians, and bureaucrats.  They are the people with political and cultural power, and they have economic power because of their political and cultural power.



Glenn Reynolds has a bunch of good links to today's Power Elite, and it's worth following them up.  Anne Applebaum speaks of the upper-middle class that has detached, and differentiated itself from the middle-middle.  Reynolds himself links the anti-American sneer to the New Class.



And here is Ross Douthat:

The public-sector workplace has become a kind of artificial Eden, whose fortunate inhabitants enjoy solid pay and 1950s-style job security and retirement benefits, all of it paid for by their less-fortunate private-sector peers...



Our entitlement system, meanwhile, is designed to redistribute wealth. But this redistribution doesn’t go from the idle rich to the working poor; it goes from young to old, working-age savings to retiree consumption, middle-class parents to empty-nest seniors... Then there’s the public education system, theoretically the nation’s most important socioeconomic equalizer. Yet even though government spending on K-to-12 education has more than doubled since the 1970s, test scores have flatlined and the United States has fallen behind its developed-world rivals...



The story of the last three decades, in other words, is not the story of a benevolent government starved of funds by selfish rich people and fanatical Republicans. It’s a story of a public sector that has consistently done less with more, and a liberalism that has often defended the interests of narrow constituencies — public-employee unions, affluent seniors, the education bureaucracy — rather than the broader middle class.

View in this light, the Occupy protesters are clearly useful idiots of the New Class, helping the elite rough up innocent scapegoats while the guilty go free.



Sooner or later the American people are going to remove this self-interested clique that imagines itself born to rule, while it corrupts itself with its sinecures and impoverishes America with its folly.  But, in the way of politics, the American people will probably not get it right first time.  And that's a shame.

Targeting the Fed

If there is anything that demonstrates the failure of expert-led government it is the Federal Reserve Board. Every time the economy tanks we find out that the Federal Reserve Board screwed up again and we hear demands for a new target to guide the Fed in its monetary policy.



In the 1920s the Federal Reserve was sterilizing gold flows; after the late 20s boom that was declared a failure.  In World War II and after the Fed targeted long term interest rates and monetized World War II debt.  In the early 50s that policy was abandoned that when inflation increased.  Then in the 70s Nixon turned back to inflationism in order to get reelected.  In the late 70s, after the dreadful inflation, the new target was the rate of increase in the money supply.  In the Greenspan years the target became inflation.



Now everyone agrees that inflation targeting is all wrong.  What is needed, according to economist Scott Sumner is "NGDP targeting."  Instead of targeting consumer prices or the GDP deflator, we should just increase nominal Gross Domestic Product by a sensible amount each year.



Maybe this new target would be better than the old target.  Who knows?  The problem is that central bankers are, first of all, the government's banker.  Central bankers make sure to smooth credit conditions for the government.  Smooth credit conditions for the government may not be the best policy for the economy.



Central bankers sit in the hot seat, so ever since government took over the central banks central bankers have been government bureaucrats and they have wanted a simple rule to govern their actions.  And there lies the problem.



The central problem in economic management is not money supply or inflation or economic growth.  It is to keep the credit system healthy.  Borrowers must make payments on time and people must have confidence that the balance sheets borrowers and lending institutions are healthy.



The proximate cause of the current crisis was that the holders of home mortgages failed on both these counts.  Overextended borrowers started failing to pay their mortgages.  That meant that their mortgages, considered as assets at the bank, were worth a lot less.  Thus the balance sheets at the banks got hammered.  Everyone headed for the exits.



Sensible bankers would have said by the mid 2000s: Wow!  Housing prices have shot up.  We should clean up our balance sheet and make sure that, if this developing bubble should pop that we have good assets that won't melt away if home prices drop.



But they didn't.  They couldn't, because the government had forced them to originate lots of loans at high loan-to-value (risky because a slight decline in home prices would put the loans under water) and lots of loans to borrowers with poor credit (risky because those borrowers are more likely to default).



There's a lot of mumbo jumbo around banking and credit.  So it helps to look at the experience of a banker like the young W.T. Sherman, of Marching Through Georgia fame.  This inexperienced banker became manager of a small bank in San Francisco in the mid 1850s.  He didn't like the look of the economy so he cleaned up the bank's balance sheet.  A key action was in reducing the loan balance of a politician that he didn't trust.  When the politician skipped town, leaving millions in defaulting debts, Sherman's bank easily survived a run, while other banks went under.



How hard can it be?  OK, it helps if the government isn't breathing down your throat forcing you to do stupid things.



The problem with government financial regulation is that it is always backward looking.  The time to stiffen credit terms is on the upswing of the business cycle, to say: Wow, asset prices are really climbing; we should not be originating any 80 percent or 90 percent loans.  Instead we get Barney Frank calling for Fannie and Freddie to roll the dice.  The time to relax credit conditions is right now, when asset prices have tumbled for a couple of years and aren't likely to decline much more.  Instead we get the Dodd-Frank bill that stiffens credit standards with impenetrable regulations.



There's a way forward here, but it isn't some new simple-minded target for the Fed.  What we desperately need is for the financial system to be run by leaders like old J.P. Morgan who really know what they are doing.  Politically-connected chaps like Alan Greenspan and Ben Bernanke just don't cut it.

Three Big Problems

In a way, the Occupy Wall Street protesters are right.  Wall Street is the epicenter of our problems.  But not in the way the protesters think.



Actually, the left has rigidly determined to misunderstand everything about the modern era.  The interesting question is Why.  Why would they be so superstitiously determined to call this age of prosperity and opportunity a monstrous age of exploitation?



The big problems we face today are a consequence of the vanity of the current ruling class, the educated elite.  Our present rulers began in the middle of the 19th century as a moral witness against the huge dislocations of industrialization.  That was a useful, if widely overblown critique.  The industrial revolution was and is rough and tough, just like Major Bagstock.  But then any transition is rough and tough, J. B.



The great mistake the modern educated elite made was that it wasn't satisfied with moral critique.  It wanted to get its hands on the levers of political power.  One thing we know in the modern age; the combination of moral and political power is a recipe for disaster.  Then it gets worse.  Pretty soon, when you combine political and moral power, you find it is not enough, so you decide to get your hands on the levers of economic power as well.  Then you have totalitarianism.



It is telling that there is idle talk among the Obamis about the need to postpone elections.  They just don't get it.



So let's get to the three problems.



Government is lousy at pensions, health care, education, and welfare.  Government is only good at things that require force, like policing and warmaking.  They are lousy at everything else.  On pensions, they have turned savings programs into vote-buying programs,  On health care they have tried to regulate the details when the details, indeed the whole system, keeps changing.  On education they have turned teaching into a pension program, and gutted the learning.  On welfare they have broken up  the low-income family.



Government is lousy at finance.   There is an argument for government getting control of the financial system.  But only during a war when government ought to have access to every instrument for winning the war.  But in all other times, government is a financial pest, because it manipulates the financial system to buy votes with low interest rates and subsidies and it abuses its debt issuing power until it ends up in debauching the currency and/or defaulting on its sovereign debt.



Government is lousy at long-term anything.  It is comical that politicians and their bribed apologists like to criticize business for short-term thinking.  Politicians are worse.  Government really cannot be allowed to do anything long-term, because it loses interest after a couple of years and then the special interests and the crony capitalists take over.



The Occupy Wall Street folks are right that Wall Street is a problem.  But only as a symptom of the bigger problem, that government is a failure and it always tries to paper over its failures with debt.  And Wall Street is where you go when you need to issue debt.



Every politician needs a friendly banker.  And that's the problem.

Never Mind Who Lost Arabia

Before we start arguing about "who lost Arabia" let us  revisit the previous argument over "who lost China."



When Mao won the half-century civil war in China after the collapse of the Manchu dynasty, the reaction in the US elite was to argue about who allowed Mao to win.  As it happened, it didn't matter. Mao managed to make China into an economic midget with his crazed socialist plans.  He managed to wreck China on both socialist fantasies: first, that a political elite can manage the economy better than business people, and second, that political activists running around annoying people are anything other than a nuisance.  The first fantasy wrecked China in the Great Leap Forward and the second fantasy wrecked China in the Cultural Revolution.  Mao's great achievement was to utterly discredit the lefty menu and clear the decks for Deng Xiaoping to inaugurate a capitalist economy and an economic takeoff.



When we look at the "Arab Spring" and start arguing about whether Bush or Obama made it worse, we are missing the point.  The peoples of the Middle East have to figure out how to get out of the economic, political and cultural mess they are in.  Whatever they do it is obviously going to be uncomfortable for us in the West.  In Tunisia, the election Sunday produced a victory for the main Islamic party and for moderate parties that ran on accommodation with the Islamists.  Does that mean that Tunisia will now go on a rampage and try to eliminate Israel?  Maybe, but if it does the US has the power to help Israel stop it.



What about Egypt?  Well, the Muslim Brotherhood might win power and it might want to go on a jihad in the Middle East to restore the glory of Egypt.  And that means they might use Israel as a foil.  But if they do, the US has the power to stop it.



The fact is that almost every political regime that takes power after a revolution tends towards aggressive behavior.  The Brits won a global empire in the century after the Glorious Revolution.  The French invaded the rest of Europe after their Revolution.  And the US conquered a continent after the Revolutionary war.  We should expect the same from the Islamic revolutions and develop plans to contain any aggression that damages our interest.



There is one problem for the Islamic forces if they plan on conquest.  War needs money, and the way you get money in the modern era is to have a thriving modern economy.  That is something that is sadly lacking in most of the Islamic world, in particular in Egypt.



Let us look at Iran, which spent the ten years after its 1979 Revolution in a fruitless war with Iraq.  For all its meddling, what has it achieved?  Anyway, at 30 years after its revolution the revolutionary generation will be soon dying out.  Normally, the fiery revolutionaries get replaced by less impressive time servers.



The bigger threat from Islamism is the migration of the Islamic peoples into Europe where they are inheriting the rotting corpse of the welfare states.  Over the past half-century the native peoples of Europe have seemed too materialistic to suffer the costs of childbearing and childraising.  There is a cost to that.  It means that someone else will inherit the future.

You Must Remember This

It's 31 years ago now.  I remember the moment exactly, driving home from work in the summer of 1980.  Ted Kennedy was delivering "The Dream Shall Never Die" speech, and it terrified me.  How could the lightweight Ronald Reagan ever win against rhetoric like that?



The answer then, and probably now as well, is that Americans aren't persuaded by left-liberal class warfare rhetoric.  It makes them want to upchuck.  And anyway, back then the "lightweight" Ronald Reagan beat incumbent President Carter in a landslide, and went on to become America's most beloved and successful president since whenever.



That's what David Brooks is saying today in "The Fighter Fallacy."  It is one thing to promise big government when Americans trust government, and back in the middle of the last century, about 70 percent did.  Today, "only 15 percent of Americans asked said that they trust the federal government to do the right thing most of the time."  Writes Brooks:

This is a problem for Democrats. But Democrats can win elections in this climate if they defuse the Big Government/Small Government ideological debate.

Bill Clinton did it with the Third Way, and snuck a bunch of liberal policies through.  Barack Obama did it in 2008 as the post-partisan candidate.  Then he governed as the left-liberal president.



After the 2010 election Obama tried compromise with the Republicans (he did?) but it didn't work.  So now he is running as a fighter.

If Obama were a Republican, he could win with this sort of strategy: Repeat your party’s most orthodox positions and then rip your opponent to shreds. Republicans can win a contest between an orthodox Republican and an orthodox Democrat because they have the trust in government issue on their side.

In other words, "The Dream Shall Never Die" won't work today either.



And then there are the facts, or rather the myths.  John Hawkins has an article on five myths the Occupy crowd believe in.  He does it well, but I've boiled it down further.

1. Wall Street Created Housing Bust. Oh no kiddies. The government did it.  They told banks to lend to bad credit risks or they might have an "accident."  Now the whole economy had an accident.


2. Obama hates Wall Street.  Yeah, I've got a bridge to sell you.


3. Iraq War created deficit.  CBO says war cost $709 billion.  Doesn't seem so big any more after the bailouts and stimuli.


4. GOP wants to kill SoSec, Medicare. However much GOP hates old people, there's a $100 trillion hole there that won't get filled by class warfare.


5. Tax the Rich. Sorry chum.  Not enough money there to make a difference.

The Occupy chappies also believe the government should forgive their $1 trillion in student debt.  Sounds like a real vote winner among the young set.  But probably poison to the other 99 percent.