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.