Election at the Crossroads

Daniel Henninger has a good essay in the WSJ on what this "historic election" is really about - whether America will turn towards it's creative, innovative impulses or towards its security and protectionist impulses. He subtitles his essay, "Shifting America's animating idea from creation to protection." [Here, subscription req'd]

He concludes that an Obama presidency would

...transform the animating American idea -- away from creation and toward protection.

Many voters -- progressive Democrats, the asset-safe rich, academics and college students -- regard this as where America should go. They explicitly want America's great natural energies transferred away from unwieldy economic competition and toward social construction. They want the U.S. to reduce its "footprint" in the world. Monies saved by stepping down from superpower status can be reprogrammed into "investments" (a favorite Obama word) in a vast Euro-style hammock of social protection programs.

Economist Alan Reynolds estimates this would cost upwards of $4.3 trillion, and wonders where and how these funds will materialize. In a WSJ Letter to the Editor Nobel economist Vernon Smith provides the answer, which I quote in full here:

I think the answer to Alan Reynolds's excellent question and article ("How's Obama Going to Raise $4.3 Trillion?," op-ed, Oct. 24) is that Barack Obama is not going to raise $4.3 trillion, and he is not going to perform on his rhetoric. He excels as a rhetorician -- common to both the great and the least of past presidents -- but performance cannot run on that fuel. Inevitably, I think his luster will fade even with his most ardent supporters as that reality sets in. We also have seen luster fade time after time with Republican presidents. The rhetoric of a smaller and less invasive government always leads to king-size performance disappointments. This weakness is as central to the reality of our political economy as are its strengths. With all its foibles, its strengths become transparent when you compare it, not with our various idealizations, but with the litter of human experiments in political economy that have delivered far more suffering and murder than human betterment to the citizens of those economies.

Of course it is entirely likely that Mr. Obama will succeed in going for higher business, capital gains and income taxes, but it is an economic illusion to think for a minute that this will benefit the poor. All our wars on poverty have been lost by failing to help the poor help themselves. Higher business taxes, which ultimately can only be paid by individuals anyway, will simply export more economic activity to the world economy. Higher capital gains and income taxes will primarily reduce savings and investment at the expense of greater future productivity, which is at the heart of cross-generational reductions in poverty. A dozen countries, including the third largest economy, already have zero taxes on capital gains, and eight of them score high on the Economic Freedom Index and high in gross domestic product per capita.

I favor making all individual savings and direct investments deductible from income for tax purposes. In that world there would be no need to make any distinction between ordinary income and capital gains. By adding a negative feature to such a net consumption tax, the poor would not only receive redistribution benefit, but have an incentive to save and accumulate capital. Some poor will see this as an opportunity to help themselves.

We swung this way politically from 1965 to 1980. In France, they tried it under Mitterand from 1980 to 1988. Neither experiment worked out very well. It won't this time either. One would hope that it didn't have to be either/or on creation vs. protection, but advocates for either direction choose to ignore the trade-off. In Vernon's last paragraph he signals the way out - which is to help the poor help themselves by becoming integrated into the capitalist accumulation process rather than on the outside looking in, hoping an afterthought of noblesse oblige opens the door a crack.

My own response to Henninger's essay was to note that we are stumbling into making a simple error of risk management, which is rooted in human nature and what all this protection is about. For lack of clearer alternatives, we have convinced ourselves that the best protection against risk is national insurance pooling. Essentially, this says we're all in the same boat and we sink or float together. Yet, the best natural survival strategy against risk in this world is to be proactive, i.e. creative and productive, in the face of change. This strategy depends heavily on the incentive structures we face. Unfortunately, the cradle-to-grave welfare state reinforces all the disincentives to manage our fears and uncertainties effectively. Pray we pull back from that long slow decline into complacency and torpor.