Now What?
After the end of World War II, when the European Great Experiment really began, countries were faced with powerful demands for ever-increasing entitlements from the middle classes whose votes elected every government. The result was an ongoing and increasingly desperate search for ways to raise the revenue required to meet the demands. Fail, and another party would be elected that would certainly find a way to do it.
As we have seen, the main strategies employed by governments to meet rising entitlement demands were (a) seizing control of the means of production, (b) taxing wealth and income, and (c) borrowing. All worked for a time, but all eventually failed.
As this is being written, all eyes are on Europe, as the Continent struggles to avoid a domino-like collapse of sovereign countries and an associated collapse of the European banking system. But note that Europe's current troubles, calamitous as they are, are merely symptoms of the larger and vastly more formidable problem: The middle classes who elect governments are hooked on their entitlements, and those entitlements can no longer be afforded.
Yes, Europe needs to find ways to stave off its current crisis, but even assuming it is successful in avoiding the collapse of the euro and the banks and the EU, only then can it begin to deal with the larger, vastly more complex challenge of learning to live within its means. And note that almost anything Europe does to stave off collapse will likely constrain economic growth for a very long time, making the problem of living within its means even more daunting.
The question therefore arises: How are the Western democracies—very much including the United States—going to get themselves out of this mess?
Well, actually, that's not my department.21 The reason it's not my department is that, theoretically, it's perfectly clear what has to happen: Entitlements need to stop growing and start shrinking, and government revenue needs to grow so we can start paying down our gigantic debt burdens. And all that needs to happen without plunging the Western economies into recession or worse.
“In theory,” as Yogi Berra is fond of saying, “reality and theory are the same. In reality, they're different.” Everybody on the planet knows what has to happen, but getting there seems to be politically impossible, not least because none of the old ideas have worked and nobody has any new ones.
Consider Greece. If ever there was a country that had its back to the wall and was facing gathering ruin, it would be the Greeks. Yet the country has undertaken virtually no serious reforms beyond those forced on it by the bond markets. Or consider Italy. Though its economy is barely one-seventh the size of that of the United States, it is the third-largest issuer of sovereign debt in the world. We know why, and we know what Italy has been spending its spectacular borrowing on. Yet the country seems to be in serious denial. In the fall of 2011 Italy attempted to placate bond vigilantes by announcing that it was considering raising its legal retirement age from 65 to 67—over 18 years!22
Or consider, I am sorry to say, the United States of America, where debt to GDP has gone over 100%,23 where the economy is stalled, where Congress can't act at all, where the Super Committee collapsed in a shambles, and where any third grader can see that middle-class entitlements will sink the country very soon.
It's fun to bash Congress, and we're all in favor of it. But the fact is that Congressional deadlock merely reflects voter deadlock. Unelected commissions (e.g., Simpson-Bowles) are always coming up with perfectly sound ideas, but nobody who needs to stand for election will go anywhere near them. It's true that opinion polls show a plurality of Americans agree that the best solution to our problems involves a combination of curtailing entitlements and raising taxes. But ask the question slightly differently and watch what happens to you:
Pollster (interviewing Medicare recipient):
Pollster (interviewing Medicare recipient): Do you agree that Medicare should be curtailed and your taxes increased?
Medicare recipient: #@*&!
In any event, broad public opinion has little impact on what happens in Congress, because our representatives (especially) and senators are elected from specific districts and states. Imagine, for a moment, that Nancy Pelosi were to announce that she was going to vote to cut Medicare and Social Security. The poor woman would be tossed out on her ear and replaced with somebody who knew where her bread was buttered. The same goes for, say, Eric Cantor.
But the problem is actually worse than that. Congressional representatives on the political left believe very deeply that the role of government is to make people's lives better, to make the population more equal, and cutting “entitlements” is morally anathema to them. Same for folks in Congress on the political right, who believe to the core of their souls that entitlements are bankrupting America. To ask such people to vote against their most deeply held principles is a nonstarter.
The Western democracies aren't precisely out of ideas, they are out of ideas that will work and can be implemented.24 Many commentators have observed that the Occupy Wall Street protestors haven't offered any solutions to their concerns. True enough, but who exactly is offering any solutions?
In addition to the paucity of realistic ideas, the West is also faced with a very disconcerting fact: We now know that all known ideas for redistributing wealth to the middle classes don't just fail (ultimately) to work, they have consequences that are cataclysmic. When state ownership of productive enterprises failed in the Soviet Union, it didn't just set the Russian people back a few years—it set them back roughly a century. Relative to other societies in Europe and elsewhere, Putin's Russia occupies about the same place in the world as Czarist Russia did in the early 1900s. Europe's “middle way” allowed it to avoid this calamity, but its long flirtation with socialism built up a culture that was, and remains, anathema to the sort of individual initiative that propels growth.
By the time high and highly progressive tax policies failed, Europe was suffering—the rich had been bled dry and there was nowhere else to turn. Britain in particular was sinking slowly into the English Channel, at whose bottom it would be lying today if Margaret Thatcher hadn't come to power.
And, of course, we all know how ruinous Europe's flirtation with borrowing turned out to be. Just to take the worst example, Greece today is the laughingstock of the world. But it wasn't always thus, and I'm not just referring to the Greece of 2,500 years ago. Not so long ago, the Greeks were a proud and virile society. As World War II was breaking out, tiny Greece (whose total population made it roughly the size of the city of Berlin) met the Axis army at its border and, astonishingly, pushed it back into Albania. Greece was doomed, of course, as it couldn't stand forever against the combined might of Germany and Italy. But when the Greeks lost the border, they fought in the villages, and when they lost the villages they fought in the mountains.25 The pathetic sight of today's Greeks rioting in the streets, throwing Molotov cocktails into bank buildings and burning innocent women alive, all in a futile attempt to continue to retire at age 50, tells us everything we need to know about the destructive power of failed wealth redistributionist policies.26
Wealthy families everywhere worry incessantly and with good reason about the challenge of raising productive, disciplined children who are outwardly focused on the needs of others. Though it's a bit of an exaggeration, it's useful in assessing the scope of the challenge Europe faces to view the Europeans as the entitled, self-absorbed, feckless children of their wealthy societies. They lack a plan for moving forward, but even if they had a plan they seem to lack the character required to get it off the dime. And it's not just Greece, Spain, and Portugal: In Italy, for example, the relatively productive north has subsidized the slothlike south for many decades and has now been milked dry.
It's possible to imagine a world—possibly cheerfully inhabited by our grandchildren—in which wealth redistribution means moving money from the rich and middle classes to the poor, where the twin sorrows of human misery and lost human potential loom like neon indictments of the wealthy West. But it isn't possible to know how we're going to get there or when it's going to happen. Political incoherence is everywhere, and the implications of this for the United States (Europe isn't the canary in the coal mine, it's the gorilla in the kitchen) are many and profound.
Which—to circle back to the beginning of this chapter—raises the interesting question of how I should be investing our capital in such a world.