Makers, Takers and the Transfer of Wealth

Paris is silent this morning. We were practically alone on the metro.

It is the day the French celebrate the founding of their republic.

“What are you doing for the 14th,” we asked a colleague yesterday.

“Nothing. I don’t celebrate it. It’s nothing to celebrate. I only recognize religious holidays. France would have been better off without the revolution. Besides, there are more religious holidays.”

The 14th of July marks the day when the French got fed up with their Louis’s. Harvests were poor. People were hungry. The spirit of the Enlightenment was in the air.

“Yes,” we replied. “You shouldn’t have killed the king…and his entire family. Now, you can’t have a royal wedding.”

The French must have looked on enviously when William married Kate.

“Well, we’ve got Carla and Nicholas,” came the reply. “And Carla is having a baby… I don’t know who the father is, but I hope it’s not Sarkozy.”

There is still some reverence for ‘the royals’ in England. When people feel they are worthy of it. A good king or queen is a treasure. With no election to face, a good monarch can focus the nation’s attention on longer-term goals…and on matters that go way beyond politics. He can connect God and man, both by example and rhetoric, helping to protect the nation’s dignity and shepherd its soul.

What do we mean, exactly? We’ll get to that in a moment. First, let’s look at what happened yesterday.

Ben Bernanke went to Washington and talked to lawmakers. AP reports:

Underscoring how fragile the economy remains two years after the Great Recession, Bernanke laid out three new steps the Fed could take, including a fresh round of government bond purchases designed to stimulate economic growth.

“We have to keep all the options on the table. We don’t know where the economy is going to go,” Bernanke told the House Financial Services Committee. The Fed chairman stopped short of promising anything, but Wall Street appeared comforted that the central bank was poised to act.

The Dow soared in anticipation. But then, Fed governor Richard Fisher rained on the parade. He said the Fed had already “pressed the limits of monetary policy.” This brought the Dow down again. It closed up 44 points. Big deal.

Gold, however, rose strongly, ending the day at a new record high in dollars, pounds and euros.

So, back to our thoughts…

Democratic politics is a sordid, mob-driven business. The great mass of mankind is neither smart nor dumb, good nor bad. But, as we say at The Daily Reckoning, it is subject to influence. And when it thinks it can vote itself someone else’s money it rushes to the ballot box as though to an over-turned beer truck.

Over the century and a half since the invention of modern, social welfare democracy, politicians have learned how to game the system. They promise voters more and more ‘benefits.’ If they only promised to give voters as much in benefits as they paid in taxes, they would be liars. It costs money to administer a government – lots of it. At best, they can only return a portion of what the government receives in tax revenues. But as the welfare states have matured, more and more people found ways to get more and more out of it. From special parking places to tax credits to military contracts… ‘benefits’ have expanded far beyond what the public can afford.

Bill Buckler, The Privateer, reckons:

Today, the US government ‘GOVERNS’ 310 million people with an annual budget of nearly $4,000 billion and TOTAL (funded and unfunded) debt approaching US$100,000 billion. It takes about 5,400 times as many dollars and about 37,000 times more debt to ‘govern’ about 3.35 times as many people as it did a century ago. Why? The answer is equally simple. Today, the US government ‘governs’ everything. It is all pervasive. It has taken over the economy from its people.

You, dear reader, know better than anyone what is really going on. As a modern democracy matures, it shifts from being a nation of makers to becoming a nation of takers. Wealth and power are gradually transferred from those who earn it to those who use the system to commandeer it. The zombies take over, in other words.

Of course, the more the takers take the less the makers want to make. Arthur Laffer explained this to Ronald Reagan 30 years ago. It was called the Laffer Curve. It explained why you can sometimes reduce tax rates and actually increase tax revenues; and by contrast, you can sometimes also increase tax rates and reduce your tax take.

So, modern, enlightened leaders try to find the optimum tax rate. Trouble is, the vox populii screams for more and more – far beyond the optimum. It wants more regulations, more protections, more cushions to sit on, more bread…and more circuses. It also wants things that go far beyond money. It wants status, privileges, recognition and revenge. It wants to see its enemies punished, its arguments proven, and its fashions, prejudices, and gods imposed on everyone.

The number of government employees rises. But so does the number of private sector employees who do work either required by the governing class…or made profitable because of it. Tax lawyers, for example, would have no income were it not for the complications of the tax system. Naturally, tax lawyers support further complications.

Whole industries are perverted and corrupted. The Pentagon recently revealed a program in which bundles of $100 bills were shipped to Iraq – presumably to pay bribes and bills. A total of $12 billion was loaded on 21 flights, packed in huge C-130 Hercules aircraft. Where did the money go? No one knows. But a Special Inspector General for Iraq Reconstruction says $6.6 billion was probably stolen – the largest theft of funds in national history.

In the health care industry, which is supposed to be in the private sector, Healthcare Analytics estimates that as much as $840 billion was wasted in 2009, thanks to various frauds, canoodles and federally-imposed mandates. Chief among these was the unnecessary care delivered to patients, simply because they don’t pay their own costs…or because health care professionals fear being sued by government-protected tort lawyers.

In the education industry, also largely underwritten by state and federal subsidies, the number of ‘administrators’ has been growing at about twice as fast as the number of teachers – for at least the last 13 years. Students and their families pay more and more for a degree and get less and less out of it. And the poor student leaves school with a burden of debt that he will carry for many, many years.

Even greater than the growth of pure government spending is the growth of this kind of private enterprise parasitism, enabled, aided and abetted by the ruling classes. Nowhere is this corporate/government conniving more degenerate than in the heart of capitalism itself – the financial industry. The big banks have become public utilities – heavily regulated, petted and coddled by the feds. When the bankers make mistakes – even trillion dollar mistakes – the feds rush in with public cash to save them. When the bankers make money, they take it home…and send some back to Washington in political contributions.

And this year, for the first time ever, the US government and its subsidiaries are the biggest source of private sector credit.

Of course, it could be worse. Just read the history of the French Revolution…or the Bolshevik revolution…or Cromwell’s Revolution…

In each case, the king was killed. What came next was lurid and disgusting.

The advantage of a good monarch is that he can espouse goals and principles that go beyond the next election. That is what could make a monarch particularly valuable now.

As the 20th century progressed, modern welfare states found that they had reached a point where squeezing more blood out of their taxpayers depressed growth rates and reduced tax revenues. The harder they squeezed, the less blood the zombies got. So, they switched from squeezing existing taxpayers to draining those who hadn’t even been born yet. The obvious advantage: the future didn’t vote. After 1980, when Dick Cheney proclaimed that ‘deficits don’t matter,’ debt to GDP ratios rose steadily in almost all the developed nations. Then, in the last 10 years, they exploded.

Greece, Japan, Ireland, Italy, the US – all have now borrowed so much that they approach bankruptcy. They are on course for destruction. And yet, if they took the right measures now, some might save themselves. At least, America still could.

But how can elected politicians reverse course…when the mob howls for more money?

Maybe a smart king could help.

More to come…


Bill Bonner
for The Daily Reckoning

The Daily Reckoning