A friend who holds a degree in political science from a prestigious university recently shared on Facebook this article by Steve Roth: “Why Welfare and Redistribution Saves Capitalism from Itself.”[i] It may be the most quintessential example of leftist bromides, non sequiturs, self-congratulations, and just plain ol’ errors I’ve ever seen. Sorting out the many wrong things about the article should be quite useful to obtain a deeper understanding of political debates about economics in America.
[BTW: I’m taking a new approach to this series of posts. See Author’s Note below the endnotes.]
As the title of Mr. Roth’s article implies, the author claims (and seeks to convince his readers) that “welfare and redistribution saves capitalism from itself.” He tries to make that case by several different means. Let’s sort out whether he accomplished his objective.
Mr. Roth’s first point is this:
“No country has ever joined the modern, high-productivity, rich-country club without massive doses of redistribution, and universal government programs for social support and financial security. Not one. Ever.”
(For the sake of brevity, I’ll use the words “collectivist government”[ii] to represent the government described in this claim.)
Let’s first observe that the claim is patently false. To see this, note that no “modern, high-productivity, rich-country” achieved that status yesterday. All those countries are the product of policies in place as they became more productive and rich relative to other countries. As we will see, collectivist governments of today are nothing like the governments of those countries when they joined the relatively “high-productivity, rich-country club.”
Most “modern, high-productivity, rich-countr[ies]” achieved that status as a result of their participation in the First and Second Industrial Revolutions (1760 to sometime between 1820 and 1840 and between 1840 and 1870, respectively). Although there were many attempts at collectivist governments over the centuries, few, if any, of the countries that had massively collectivist governments before 1870 became highly-productive or rich as a result of the First or Second Industrial Revolutions.
It was only after Germany became rich at the end of the Second Industrial Revolution that Chancellor Bismarck kicked of the modern era of collectivist government. The UK initiated its “welfare state” with the election of the “Liberal Party” in 1906. America kicked off its “welfare state” in the 1930s. The period between 1906 and 1930 was a period in which the US put the UK in the shade economically. All of these welfare states started after counties distinguished themselves as “modern, high-productivity, rich-countr[ies].”
Note also that Mr. Roth offers no example of a country with a massively collectivist government economically gaining on, much less overtaking, a country with a less collectivist form of government.
Worse, he ignores clear examples that refute his claim. I’ll mention one. (While there are several, just one is necessary.) Estonia clearly contradicts his assertion that “no country has ever joined the modern, high-productivity, rich-country club without massive doses of [collectivist government].”
“After Estonia moved away from Communism in the late 1980s and became an independent capitalist economy in 1991, it emerged as a pioneer of the global economy. . . . The country has been quickly catching up with the EU-15; its GDP per capita having grown from 34.8% of the EU-15 average in 1996 to 65% in 2007, similar to that of Central European countries. It is already rated a high-income country by the World Bank. . . . Because of its economic performance after the Soviet breakup, Estonia has been termed one of the Baltic Tigers.
“In 2008, Estonia was ranked 12th of 162 countries in the Index of Economic Freedom 2008, the best of any former Soviet republic. The same year, the country was on bottom of Europe by labour market freedom. . . .” [iii] [Emphasis Added.]
“With a population of just 1.5 million, Estonia does not have a very large welfare budget in either absolute or relative terms.”[iv] [Emphasis Added.]
Estonia, like all its fellow Soviet satellite states, was impoverished in 1991 when it gained freedom from the USSR, but it was among the poorest.[v] Before the Berlin Wall fell, Estonia’s estimated GDP per capita was $2000 while neighboring Finland’s was over seven times that. “. . . during 1993-1994, Estonia went from an almost unknown spot in the world for foreign investors to a mecca for them.”[vi]
How did Estonia pull off “The Estonian Economic Miracle?” Estonia had the good fortune of electing Mart Laar, a fan of Milton Friedman[vii] (a staunch opponent of collectivist government), as Prime Minister (1992-1994 and 1999-2002).[viii] Using free-market economics and a small welfare budget, Laar enabled Estonia to become a “modern, high-productivity, rich-country.” In short, contrary to Mr. Roth’s claim, Estonia is a country that became a member of the modern, high-productivity, rich-country club without massive doses of collectivist government.
The main takeaways of this post are: 1) Presenting a factually false claim, as discussed above, proves nothing; 2) The fact that rich countries today are “massively” collectivist proves neither that collectivism is what enabled them to join the rich and collectivist “club” nor the proposition that a country must be collectivist to become rich. Consequently, Mr. Roth’s first claim does not support the general claim that “welfare and redistribution saves capitalism from itself.”
There is much more to this story, which will be taken up in future.
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[i] Please read the article, but please also suspend any belief that it makes a lick of sense until you’ve read my several posts about the article.
[ii] This term is intended to describe any form of government (regardless of its label) that has a primary mission to “run the economy” in way that redistributes wealth from “the rich” to “the poor.”
[iii] “Estonia Investment and Business Guide Volume 1 Strategic and Practical.” Pg. 25.
[iv] “Which are the best countries in the world to live in if you are unemployed or disabled?”
[v] “The Estonian Economic Miracle.”
[vi] See endnote vi.
[vii] In “Walking on Water: How to Do It,” Laars said, “It is very fortunate that I was not an economist, I had read only one book on economics – Milton Friedman’s “Free to Choose.”
[viii] “Mart Laar’s Economic Guidebook for Estonia: Free To Choose”
Author’s Note: I’ve been advised that my blog posts are too long. I plead guilty to that charge. My excuse has been that the ideas covered by my blogs are so multifaceted, steeped in misunderstanding, and dangerous that a fairly thorough drubbing of them is necessary for the sake of our children and grandchildren (and everyone else in the world). This is why I spend so much time writing blog posts. I have also been concerned that unless I cover the waterfront, skeptics will jump and cling to what they believe to be unaddressed counterpoints that refute my arguments—and dismiss my arguments on that basis. On the other hand, if my posts are so long and rambling that too few read them, I am defeating my own purposes. Therefore, in tackling the many flaws in the article hyperlinked above, I will try presenting more bite-sized pieces of data and analysis and cover topics over several posts.
3 points.
1) Friedman personally advised Chile’s brand-new military (and far from economically astute) junta on how to turn their economy around and his recipe appears to have had risen that country to the level of one of South America’s premier economies in the late 70’s and 80’s (despite Pinochet’s frequent and deplorable human rights issues when squelching the collectivists of his day).
2) Roth says that libertarians and free-market conservatives detest sharing. I would like to see his research on that since I doubt there are explicit data measuring such qualities, unless they are in dollars donated, in which case, I’m fairly confident that most share at least as much or more than those whom he did not mention. I’m concerned, though that he may be confusing ‘sharing’ with ‘being extorted’, where ‘sharing’ describes distributing something you own (sharing lunch at the cafeteria table), while extorting is acquiring something by use of force and threats (extorting lunch money in the bathroom). It is very difficult for people to share what they don’t have to begin with, let alone sharing it wisely.
3) I like the idea of you breaking the tomes up into fun-sized morsels, however that doesn’t preclude you from having all the morsels completed and hyperlinked to serve as your proleptic counterpoint (credit to Roth for providing me with my new word of the day). That is a LOT of work, but can be more confidently shared on a broader stage.
Also, I wish there was a way of editing one’s own grammatical/editing mistakes out of one’s own comments. Oh well.
Harvey, I like the new shorter approach. Also, having just been in Estonia, I can vouch for the vibrant economy and positive progress that has been made there. We were told that many Finns now take the ferry across the Baltic to shop in Estonia where prices are cheaper and to avoid the high taxes of Finland.
With Amandeep Singh’s kind permission, I have pasted below two comments he made about this post on Facebook:
Amandeep Singh Sandhawalia Even if someone were to accept Roth’s underlying assumption, that wealth redistribution is correlated with national prosperity, there are still two glaring flaws with the paradigm he is advocating for:
1) He offers zero evidence for which is the cause and which is the effect as to redistribution vs. prosperity.
2) He completely ignores charitable giving. This is also wealth redistribution after all. Roth wants to advocate for a government run welfare state, but if wealth redistribution is so important for economic success, it should not matter economically whether it’s done by choice or by compulsion as long as the total value of the transfers are the same. .
I’ve only done a glance over at the charts, but not unsurprisingly, there is an inverse relationship between tax rates (https://taxfoundation.org/comparison-tax-burden-labor…) and charitable giving (http://ccss.jhu.edu/…/Comparative-data-Tables_2004…) The countries with the highest tax rates tend to have the lowest voluntary donations.
Roth offers no reason to believe that wealth redistribution by welfare state is superior to charitable giving, or that charity would not or could not replace the wealth distribution that would otherwise be lost by switching to a less robust welfare state.
A Comparison of the Tax Burden on Labor in the OECD, 2016 – Tax Foundation
Download FISCAL FACT no. 522: A Comparison of the…
TAXFOUNDATION.ORG
Amandeep Singh Sandhawalia It’s also worth noting that the studies referenced by the left concerning wealth inequality in America deliberately exclude SSI, Medicare, Medicaid, Unemployment, Welfare, etc. Statistically, they justify this decision by reasoning that these are not guaranteed to be paid out in the future so should not be counted. Practically speaking though, the result is creating the impression that the less wealthy appear even LESS wealthy they are by assuming the value of all these programs is zero. Similarly, these same studies use pre-tax numbers in computing how rich the rich are … as if its perfectly ok to ignore that every dollar Warren Buffett would actually attempt to spend of his wealth is actually only worth 75c or less.
Once everything is accounted for, most if not all of the growing wealth gap ends up explained by the fact that the wealthy are able to invest their wealth, while the poor are forced to keep their wealth in welfare state entitlement funds that grow at a much slower rate.
With Amanda Austin’s kind permission, I am pasting below are response to this blog post and the comments above by Amandeep Singh that she sent directly to me.
Hi Harvey and Amandeep. You’ve brought up some interesting points. Harvey, I’ll take a minute to go through some of your main points and we can leave the rest to when we meet. Amandeep, since I do not know if we will have a chance to have this discussion in person, I’ll try to give your questions a brief reply.
Harvey:
1. You are correct that there is more than one way for a society in an environment of scarcity to get closer to what I will call an equilibrium in resources per capita, which tends to result (at least temporarily) in a more equitable distribution of resources. The first is to redistribute wealth. The second is to shorten people’s lifespans (kill them, marginalize them from economic and social opportunities, etc.) and take resources that otherwise would have gone to them. History is replete with examples of the latter strategy (lots and lots of war, repression, discrimination, etc.).
As we’ve discussed previously, as levels of human capita increase over generations, it becomes more costly – from a utilitarian resource perspective – to kill people. Killing people also has the disadvantage of reducing the cooperative capacity of a society, so it results in a lower overall level of societal productive capacity when compared to redistribution. (I can show you how all this maps out when we meet.) Of course, in situations of severe scarcity, one might not enjoy the option of wealth redistribution. In many historical cases, though, high levels of inequity precede mass death, where those who have been able to accumulate resources hoard their wealth, thus exacerbating the crisis. The resource-rich then have a higher likelihood of surviving the ensuing violence and gaining what others have lost. This process is part and parcel of human evolution. Interestingly, over time, though, the percentage of the population dying in these mass death crises (war, famine, etc.) has gradually lowered as human capita investment has increased.
Austerity increases mortality (a short version of why is available here http://www.nytimes.com/2013/05/13/opinion/how-austerity-kills.html and there are several books on the subject), as we saw in the case of Estonia. By choosing a policy that reduces society-wide cooperation and redistribution of wealth, vulnerable members of a population die. Surviving members can then take their jobs, school placements, and goods to use for their own investment. A strategy of investment/redistribution, on the other hand, increases the capacity and productivity of those vulnerable members of the population. The increase in human capital investment makes a society more peaceful because – again from a utilitarian resource conservation perspective – it is more wasteful to kill. We can discuss this point further when we meet. In the interim, note that mortality rates are a far better indicator of a society’s well-being than GDP.
2. As for the Cato critique of Pikkety, I’ll make a few quick points. If you want to get into the weeds when we meet we certainly can too. McCloskey fails to recognize that human capital accumulation concentrates itself alongside capital. High levels of inequality are accompanied by wide educational attainment differences. Widely differing educational attainment levels have severe implications for a society’s ability to sustain a democracy, innovate new technologies, prevent violence, engender trust, motivate cooperation, etc. Yes, there are demonstrable historical problems with high levels of inequity (we can discuss the definition of high levels further when we meet). Many of those problems are becoming achingly apparent in American society today. Environments of scarcity, in which one would expect to find high levels of inequality also demonstrate a bifurcation of mortality rates between the rich and poor (http://news.mit.edu/2016/study-rich-poor-huge-mortality-gap-us-0411).
Now, I do agree with McCloskey that we should be concerned with lifting people experiencing poverty, but the extent to which that needs to be done we disagree. I also disagree with him about his historical analysis of what constitutes appropriate levels of resources per capita. He gets the long arc of history right in that respect, but misses what has happened, at least in the US, since the 1980s. I’ve read your previous post about inequality, so we will need to discuss the nature of our difference on this matter further.
An additional critique of Pikkety’s work by another Cato Institute author actually underscores the Evonomics author’s original point in that taxes and transfers serve to slow or stop the widening inequality that naturally occurs under a laissez-faire capitalist system (https://www.nytimes.com/2014/05/10/upshot/pikettys-arguments-still-hold-up-after-taxes.html?_r=0). Harvey, I’ll look forward to your second post on the subject. I’m very curious to hear your structural refutation of Pikkety’s r>g and the Matthew Principle.
3. I am very curious why neither you or Amandeep responded to my earlier point about mortality. You both wrote a lot about economics, but not at all about the value of life. It’s an honest and not a critical question. I am really curious.
Amandeep, thank you for your thoughtful reply.
4. As for your first point, this article is clearly non-academic and intends to summarize an economic theory. I generally do not share peer-reviewed academic articles on Facebook, as they can be pedantic. I can offer my personal, general opinion of what maximizes societal capacity: high levels of investment in human and public capital (e.g. guarantees of human rights, public infrastructure investment, and redistributive systems when necessary) balanced with high incentives for cooperation (e.g. capitalism, marriage, shared value systems). Capitalism is a cooperative system that – like all cooperative systems – does both harm and good. High guarantees of human rights remove the harmful elements of capitalism, but retain the helpful ones.
5. As for your question regarding charitable giving, an inverse relationship between private charitable giving and public spending is to be expected, as most developed nations’ public spending offsets the most dire levels of impoverishment. Public spending, however, is far preferable to private charitable giving for a few reasons.
One, in a system of laissez-faire capitalism where one would expect higher levels of inequality, the rich are less exposed to the poor, particularly via income segregated neighborhoods and schools. Lack of exposure leads to lack of empathy and lack of knowledge (unless you are an expert in poverty) about the levels of poverty in one’s society. Many (though not all) of the rich who do not actively seek to better understand poverty consequently underestimate its extent, impact, and causes.
Two, a democratic society is better situated to define its allocation of resources than individuals, whose charitable giving may maximize their own interests (e.g. donations to private alma maters or arts in lieu of public education and poverty). With that said, there are many wealthy individuals who practice effective altruism, a concept many governments would benefit from employing. Regardless, public decisions on expenditures moderates the self interest of private decisions on charitable giving allocation.
Three, private giving magnifies personal implicit biases, disfavoring out-groups; whereas public expenditures in most democracies disallows discrimination. With that said, the quality of the democracy, which is in turn dependant upon other factors like human capital investment (http://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=1365&context=facpubs), greatly impacts whether or not a government follows smart distributory principles like effective altruism. This point runs us full circle back to my main point that high level of human capital are a critical component of maximizing societal productivity.
6. For your final point, please see the last paragraph of point number 2 and (https://www.nytimes.com/2014/05/10/upshot/pikettys-arguments-still-hold-up-after-taxes.html?_r=0).
OK, guys. I am going to have to end the conversation here. Feel free to reply, but I have to focus my attention elsewhere and may not be able to respond in kind. Thanks again for the great conversation!
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http://www.nationmaster.com/country-info/stats/Economy/GDP-per-capita-in-1900
Point to one rich, thriving country in the world today that doesn’t engage in massive government social support and redistribution.
Even China, on its rapid recent road to riches (though GDP/cap is still <$10K), is rapidly closing on 20% of GDP in social support.
To repeat the Q: why has no right-libertarian country emerged and surged ahead of all the rest? If right-libertarian policies are are so economically efficient, it should have happened, right?
I cannot name one rich country that does not engage in massive governmental social support and redistribution. That is a point you made in your article that I did not dispute. Why ask about something you said with which I agreed?
As I established throughout this series of posts, the fact that they do says nothing about whether they do too much or too little, and, more important, does not support your basic claim that redistribution saves capitalism from itself.
To repeat the Q: why has no right-libertarian country emerged and surged ahead of all the rest?
If right-libertarian policies are are so economically efficient, it should have happened, right?
In essence that was a question you asked in your article and I thoroughly addressed it in my post. If you are going to just re-ask the questions posed in your article or restate your assertions, I see no point in restating my case in the comment section.
I will point out that one of the most right-libertarian country in the club, America, has not only economically outperformed the other, it is covering the cost of most of the national defense and most of the technological innovations in both products and cost cutting techniques of many of the rest of the club membership. Another example is Germany, which, as you say, “a darned “conservative” country that is thriving today” is in that position only because of Germany’s major curtailing of its liberal labor policies (reducing the amount of its redistribution) that ushered in Germany’s rise from being the economic “sick man of Europe” to performing as well as it did through the Great Recession. See “Wunderreform,” https://www.economist.com/news/europe/21573583-ten-years-how-does-germanys-agenda-2010-package-rate-wunderreform