The welfare state:
Karl Marx (1818 – 1883) was basically right. History is largely a class struggle. “Back in the 18th century, people wondered how society could function without divinely-appointed kings to hold things together. But then came the American Revolution and the French Revolution – Napoleon was booted out – that turned kings and queens into celebrities. The ruling classes (RK Mafia) realized they had to find a way to keep a lid on the public.
For that reason at the end of the 19th century Bismarck created the welfare state. He figured how he could buy off the public. As long as they were getting money from the state, people wouldn’t revolt.
Essentially, the deal that Bismarck struck was the one that caught on and endured. The rich agreed to pay a lot in taxes so that the poor would stay in their places. Then, every time this new order was threatened – in England after WWI, in France before and after WWII, in America in the 1960s – governments just gave out more money. They spent money on guns and butter – military and social welfare programs.
Otto von Bismarck (1815-1895) couldn’t have dreamt what a resounding success his invention has become. Almost every advanced government copied his invention in one form or another. He liked it because he thought he was going to give something for nothing. The welfare state proved that he was right. The expenditure of the first generations in the welfare system was easily financed by larger, richer generations that came afterwards. Political leaders liked it too because it made voters more dependent and controllable: the people would not revolt as long as their pension payments and benefits were paid.
More and more benefits were added – education, health, unemployment compensation, parks, libraries, and so on. Ordinary people began to spend more time at universities than they spent in pubs. More bureaucrats, burdensome service procedures, like those of health care were made increasingly complex, cumbersome and expensive. Thousands have been deployed to the general welfare of the people to regulate, control, protect and monitor the public.
Millions more were pretending to have something malicious and so were the leeches in society created. One received a grant for his farm. Another was paid because he was disabled at work. The next saw his poorly managed bank bailed out by the state. The problem is obvious; the costs go out of hand.
What happens to the social welfare state when the number of people who are meant to be supported becomes larger and larger, while the number of people who are meant to be supporting them becomes smaller and smaller? It is the budget overruns that now wreck havoc in the world’s largest debt crisis ever.
Taxes:
Since the days of Bismarck, money is taken from citizens and paid back in the form of various social spending programs. The ever-successful politicians allow spending to outstrip revenues, but not as much that it appears irresponsible. The more benefit promises the more voters, to gain more power, and the more money is shifted to the favored RKM-insiders.
Growth over the last hundred years; in population, GDP, wages, prices, made it possible to expand government spending significantly, ever anticipating larger, richer generations that would support the smaller group of incapables and elderlies.
The mathematics of this system held up fairly well, until recently. Now, population growth rates are falling everywhere in the developed world, with a huge group of baby boomers preparing to retire and voting themselves the most lavish benefits in history. Without growth, this system of public financing is doomed to a spectacular failure. More spending will not be better; it will be disastrous.
Currently, no major government in the developed world can make good on its promises. The financial obligations are growing 21 times faster than the economy that has to pay them.
And when so many people depend on so few contributors, an economy will fail. It can’t possibly grow when the imbalance is so strong. It is a hugely important concept. The tipping point is reached. Push the scales any harder, they will tip, and there will not be any way to fix the mess that ensues.
The Practice:
To demonstrate how disastrous it has become, a realistic example how socialism functions, and eventually kills itself:
Every day, 10 men gather in a bar chatting and drinking a beer. The total account of the ten men is 100 €. They agree to pay proportional in the same manner they are taxed in society by the tax office, so that each participant’s charge would be more or less equal, according to the scale of wealth and income of each individual:
The first 4 men (poorest) pay nothing.
The 5th pays € 1.
The 6th pays 3 €.
The 7th pays 7 €.
The 8th pays 12 €.
The 9th pays 18 €.
The 10th (richest) has to pay 59 €.
Thereafter, all had fun and kept the agreement between them, until one day the bar owner put them in a problem: “Well, you are such good customers, he said, so I will reduce the cost of your beers with 20 €. – The drinks now will cost you 80 €.
The group, however, continue to pay the account raised in the same proportion as they did before.
The first four continued to drink for free, the reduction did not affect them at all.
But how should the other six drinkers share the bill? How should they allocate the € 20 discount so that each one makes a fair contribution?
They calculated that 20 divided by 6 is € 3,33, but if subtracted from the original payment charge the 5th and the 6th man wouldn’t be charged for the drinks at all, because those were paying before 1 € and € 3 each.
Then the bartender suggested it would be fair to reduce each account for, approximately the same proportion, and made a calculation of the amount each one should pay.
The 5th drinker, like the first four would not pay anything: (a 100% saving).
The 6th now pays € 2 instead of € 3: (saving 33%)
The 7th pays € 5 instead of € 7: (saving 28%).
The 8th pays € 9 instead of € 12 (saving 25%).
The 9th will pay € 14 instead of € 18 (saving 22%).
The 10th has to pay € 49 instead of € 59 (saving 16%).
Each of the six payers was now in a better position than before: the first four drinkers continued to drink free of charge and fifth too. – But once outside the bar, they began to compare what each one was saving.
“We just received a € 20 euro saving,” said the 6th man from which the 10th drinker received 10 €”
“You’re right,” said 5th man. “I only saved € 1; which is unfair, he the 10th get ten times more than me.”
“You’re right!” Cried the 7th man. “Why did he get € 10 discount when I only receive € 2? The rich always get the biggest profit!”
“One moment,” yelled the first four at once. “We have not received anything at all. The system exploits the poor!” The nine men surrounded the 10th and gave him a beating.
The next night the 10th man did not come to drink, so the nine sat together and drank their beers without him. But when it came to paying the bill they discovered something very disturbing: Between them they only had money to pay for half the bill.
And so, everyone understands now how the tax system works. People who pay the highest taxes are the ones who benefit most from a tax reduction.
Conclusion: Charging the rich with the highest taxes just for being rich is incorrect.
The Moral: “Socialism ends when run out of other people’s money.”
Fiscal monetary mess:
There is no crystal ball required to anticipate how to get the world out the fiscal and monetary mess, more important is to understand the system, and since the policy is driven solely by political wisdom and incentives, it will not change. It just will continue with austerity and stimulus – without reform it will stay with the same chronic zero-interest rate policy, and money printing.
If these facts change, then it is time to think about selling your gold and silver – but for now, nothing will change.
Other people’s money Danny Devito begging speech:
Listen what is better than dogs…
Other People’s Money fragment 1
With Dutch under titles, very instructive about what has happened the last decennia in industry.
Other People’s Money:
This clip is from the 15-part lecture series, “Milton Friedman Speaks”
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