Friday, February 17, 2012

Government Frog Boiling in the U.S., Detroit and Scotland

Frogs placed in a warm pan of water become contented and complacent. When the heat of the water is gradually increased, the frogs may not notice that it's becoming increasingly hazardous to their health. If that's the case, eventually those remaining in the pan will lose consciousness and die. Perhaps with a smile on their face, but they'll still be dead.

We have numerous boiled frog experiments being conducted today around the world as well as within the U.S. How the various frogs fare in the end will depend solely on whether they choose to exit the pan before it's too late. Time will tell.

Now let's look at the relationship between freedom loving individual citizens and their chosen collective governments.

Our free market economy has produced the highest standard of living in the world. Our individual freedoms have been the envy of people across the globe. Now we are in danger of forfeiting much of what made us great and instead endorsing a redistributionist government welfare state which would dominate freedom loving individuals and private sector wealth creation.

Such a Robin Hood society may make lots of people feel good temporarily, but the end result would be disastrous for all, and especially the poor and aspiring middle class among us.

We know about the current travails of Greece, Spain and Italy. Today we'll add to the mix the U.S., the city of Detroit and Scotland. Combined they tell a compelling story.

What Would Clint Eastwood Do? states the U.S. issue bluntly:

"The Barack Obama budget document just released is not a budget. It is a work of literature. It is Barack Obama's published apologia for a second presidential term, in which—as the budget and its tax proposals make clear—he will reset the historic balance in America between the public sector and the private sector. This reset will require large wealth transfers—from individuals and companies to the government, and from the government back to the people.

The Obama budget is described everywhere as a "political document," but it is more than that. Mr. Obama hasn't assembled these ideas just to get elected. This budget is a statement of belief. It is a road map of where he wants the country to go. . . .

There is no better way to discover this intent than in the president's tax proposals. Taxes are a nation's Rorschach test. In taxes you discover how a nation wants to be known to others. The burden of taxation may say that a nation more than anything wants to produce (say, Malaysia), or taxes may say that what a nation most wants is to be thought of as fair (Belgium).

What Mr. Obama wants, with the symbolic billionaire Warren Buffett propped at his side, is a wealth tax that redefines the U.S. . . . .

No more certain sign exists that a nation has chosen to step off its historic upward path than the creation of wealth taxes. A nation imposes a wealth tax when it wakes up one day to conclude that it has become embarrassed, rather than proud of, its wealth, which is to say, its national success.

We are not talking here about the vast wealth that closed, crony economies direct toward a small plutocracy and no one else, though this rigged scam seems to be Barack Obama's understanding of the modern American economy. The reality is that since its inception the U.S. has been an open, free economy that let wealth, including vast wealth, flow to dreamers, geeks and college dropouts whose unpredictable success multiplied into greater wealth for others. . . .

The Obama budget says one reason for its wealth taxes is to provide sufficient revenue to protect "the investments we need to grow the economy and create jobs." He does the investing, and the economy grows."

Now let's quickly look at Notable & Quotable for what the past 62 years in Detroit, "a model of progressive urban policy," can tell us about where President Obama's proposed progressive approach would take America:

"Imagine a city where all the major economic planks of the statist or "progressive" platform have been enacted:

A "living wage" ordinance, far above the federal minimum wage, for all public employees and private contractors. A school system that spends significantly more per pupil than the national average. A powerful school employee union that militantly defends the exceptional pay, benefits and job security it has won for its members. Other government employee unions that do the same for their members. A tax system that aggressively redistributes income from businesses and the wealthy to the poor and to government bureaucracies.

Would this be a shining city on a hill, exciting the admiration of all? We don't have to guess, because there is such a city right here in our state: Detroit.

Detroit has been dubbed "the most liberal city in America" and each of these "progressive" policies is alive and well there. How have they worked out?

In 1950, Detroit was the wealthiest city in America on a per capita income basis. Today, the Census Bureau reports that it is the nation's 2nd poorest major city, just "edging out" Cleveland.

Could it be pure coincidence that the decline occurred over the same period in which union power, the city government bureaucracy, taxes and business regulations all multiplied? While correlation is not causation, it is striking that the decline in per capita income is exactly what classical economists predict would occur when wage controls are imposed and taxes are increased."

Finally, let's conclude our boiled frog survey by looking at Scotland and its dominant public sector in Scotland's Constitution Is Not the Problem. Here's what's said about the country's dependency on its public sector:

"Today, a quarter of people in Scotland are directly employed in public service. This compares to 20% in England, though it's still well under Northern Ireland's near-Greek 29%. But that's before we count Scotland's large, effective secondary public-sector market, made up of everything from public-relations firms to construction companies.

Many of these businesses are entirely dependent on state contracts for their revenue, though it's difficult to estimate just how many. Once we've excluded all these technically private but state-dependent firms, what is left of Scotland's real economy is a small amount of manufacturing, some tourism, bailed-out financial firms and subsidized energy production. This is not enough for a thriving economy to stand on its own. . . . Labour Party leader Ed Miliband recently called for an increase in the size of the public sector throughout the U.K. as a means of solving unemployment problems.

Such solutions will only make the problem worse, by further crowding out the private-sector activity necessary for a sustainable economy. Mr. Miliband's generations-old ideas about stimulating an economy from the top are at least in part how the U.K. wound with unsustainable government spending and ballooning debts in the first place. . . . One cannot help but wonder what Scotland—independent or not—could be if the forces of vibrant private enterprise were unleashed in it.

Industry of any kind will not and cannot thrive with so many of Scotland's best people and industries laboring on taxpayers' money. Empowering profitable businesses and productive workers would mean ending their reliance on government contracts. It would also mean getting the state out of their way, so that these businesses and workers could compete to provide services currently administered by the government. Scottish education, for example, could see important innovations if only the state would allow private, for-profit players to enter the marketplace.

Scotland is hardly alone in its need to move from dependency to enterprise. It is an enduring issue in regions throughout the U.K. and elsewhere in Europe."

Summing Up

So there we have it. A bigger public sector comes at the expense of the private sector. There's no other way. A growing government means a greater citizenry dependency on that government. Greater dependency on government means less reliance on oneself. That spells less individual freedom.

While the U.S. economy isn't cradle to grave government at this point, that's where too many politicians are willing to take us. The road begins with expensive and poor quality K-12 public schools and continues through college. On top of that, a stagnant economy leads to a youth unemployment rate of ~20%, which results in even greater government dependency.

Upon reaching adulthood, add to the mix a big spending government, a big government workforce and a growing government "safety net." All this bigness translates into even less private sector activity.

Finally, as we reach the old age for which we haven't saved adequately, Medicare, Social Security and Medicaid (nursing home care) will kick in to complete the dependency trap. The frog is really struggling at this point.

In this environment, not much time or money will be left for private sector job creating innovativeness, initiative and self reliance. But for those remaining few citizens who do dare to be entrepreneurs and builders of businesses, the newly important tax man will be lurking around the corner.

And if, as and when all this occurs, the U.S. economy will come to look just like Detroit, Scotland and countless others. And there won't be anyone left to pay for all this "good" government.

You see, redistribution requires first that the government can take something away from somebody. In this case, the "takee" is the wealth creating private sector. Otherwise government won't be able to redistribute its bounty to others it deems to be more deserving.

To paraphrase Margaret Thatcher, this type of OPM government spending will only cease when there is no more OPM left for it to spend.

To recap, if no MOM wealth is first created, there is no OPM wealth which can then be redistributed.

At that point, the frog is boiled, smiling or not.

Thanks. Bob.

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