Beware political opportunists, they’ll impoverish us all
https://arab.news/rxmyq
A larger share for the state in the economy seemed like a good idea for economists after the Second World War, but they disregarded the role of politicial opportunists. Politicians reap instant credit and win votes when they promise to spend public money, but the harm that creates is too far in the future for them to be held accountable for it.
The result is a global debt crisis and malaise, with both millennials and Generation Z fearing for their future financial security. The first two UK generations who benefited from the services of the welfare state lost their savings from the inflation it produced: the state gave with one hand and took with the other.
The originator of the modern welfare state was Otto von Bismarck, the Prussian statesman and first chancellor of a united Germany. It was conceived as a set of welfare reforms such as social insurance, national health and retirement pensions for German workers that would act as an antidote to socialist ideas.
Bismarck was held in high esteem in Europe, especially after his victory in the Franco-Prussian war and the fall of Paris in 1870, and many of his ideas were adopted throughout the 20th century. Added to them was a revolt against Victorian values of thrift and saving after the First World War, with the extravaganza of the Roaring Twenties. The economist John Maynard Keynes expressed it in his famous phrase — “In the long run we are all dead” — and advocated state spending to stimulate the economy like there was no tomorrow. Others came up with ideas that this would produce a multiplier effect and that there were increasing returns because the state operates at a larger scale. President Roosevelt’s New Deal after the Great Depression in the US with its three R’s of Relief, Recovery and Reform mainly through public works was also inspired by Bismarck.
For all these reasons the institution of the state emerged after the Second World War armed by economists with solid theoretical tools to take over much of the economy. The weakness in the system is that it ignores the fact that for politicians this translates into a license to spend. We all know that money and elections don’t mix well. In ancient Greece Pericles warned against this and so did some economists who were opposed to the role of the state.
The institution of the state emerged after the Second World War armed by economists with solid theoretical tools to take over much of the economy.
Nadim Shehadi
The argument against the state goes like this: Politicians promise to spend money and get votes in return, the harmful impact of that spending in terms of inflation and public debt will accrue to the next generation by which time the politician is safely out of the picture and hence unaccountable. Worse than that, their rivals will have to promise even more spending to defeat them in the next elections. This goes on expanding the bubble until it is about to burst, which is what we feel with most of the world currently on the edge of a financial crisis.
We are seeing this happening today. In an excellent article about Bidenomics in Arab News recently, the author described how in answer to warnings about the inflationary impact of all the spending President Joe Biden was promising, he left the monetary aspects to the Federal Reserve to deal with — presumably when the problems appear in the future, certainly after the elections next year.
The Austrian economist Ludwig von Mises called this a “Trumpery” (this was in 1947 and has nothing to do with Donald) — that politicians postpone the problems to a time when they are safely out of the picture,having already reaped the electoral benefits. This is how the next generations inherit the burden from the previous ones.
By the 1960s the state was promising everything — health, education, employment and housing — and in return took almost everything: taxes in the UK were around 60 percent and reached a marginal rate of 90 percent for high earners. Who needs money, wealth or inheritance when the state will take care of you from the cradle to grave? But will it really?
My fellow students in the UK in the late 1970s were fully supported by the state and expected to graduate with a job and a career that would allow them a comfortable life. They had free housing and full grants and their tuition was paid for, even the beer in the college bar was subsidized. They also applied for unemployment benefits during the longer breaks between terms. They were the last generation to profit from a welfare state that guaranteed them lifelong economic security.
Who needs money, wealth or inheritance when the state will take care of you from the cradle to grave? But will it really?
Nadim Shehadi
Their parents before them were the first to benefit, and also the first victims of the system. By the time the boomers retired, their state pension had been eroded by inflation and instead of guaranteeing them a leisurely retirement with golf and cruises, it is barely enough to live on fish and chips and buy cigarettes to help them die earlier.
As for the current generations, they still have to pay taxes, but get much fewer benefits. Health, education, employment, social insurance and pensions are no longer to be taken for granted. They graduate with huge debts and their salaries are barely enough to cover the bare necessities. Yet surveys of millennials and Generation Z find that they tend to be more “liberal” and tend to vote for politicians who promise to wipe out their debt and guarantee them state social services, thus kicking the ball further down the road.
The solution is probably to starve the beast and keep the money away from the hands of politicians. If the system does not blow up on their watch, they will be transferring an even bigger bubble to the next generation.
- Nadim Shehadi is a Lebanese economist. Twitter: @Confusezeus
