THE LESSON AFTER THIRTY YEARS
THE FIRST EDITION of this book appeared in 1946. It is now, as I
write this, thirty-two years later. How much of the lesson
expounded in the previous pages has been learned in this
period?
If we are referring to the politicians—to all those responsible
for formulating and imposing government policies—practically
none of it has been learned. On the contrary, the policies
analyzed in the preceding chapters are far more deeply established
and widespread, not only in the United States, but in
practically every country in the world, than they were when
this book first appeared.
We may take, as the outstanding example, inflation. This is
not only a policy imposed for its own sake, but an inevitable
result of most of the other interventionist policies. It stands
today as the universal symbol of government intervention
everywhere.
The 1946 edition explained the consequences of inflation,
but the inflation then was comparatively mild. True, though
federal government expenditures in 1926 had been less than $3
billion and there was a surplus, by fiscal year 1946 expenditures
had risen to $55 billion and there was a deficit of $16 billion. Yet
in fiscal year 1947, with the war ended, expenditures fell to $35
billion and there was an actual surplus of nearly $4 billion. By
fiscal year 1978, however, expenditures had soared to $451
billion and the deficit to $49 billion.
All this has been accompanied by an enormous increase in
the stock of money — from $113 billion of demand deposits plus
currency outside of banks in 1947, to $357 billion in August
1978. In other words, the active money supply has been more
than tripled in the period.
The effect of this increase in money has been a dramatic
increase in prices. The consumer price index in 1946 stood at
58.5. In September 1978 it was 199.3. Prices, in short, more
than tripled.
The policy of inflation, as I have said, is partly imposed for
its own sake. More than forty years after the publication of John
Maynard Keynes' General Theory, and more than twenty years
after that book has been thoroughly discredited by analysis and
experience, a great number of our politicians are still unceasingly
recommending more deficit spending in order to cure or
reduce existing unemployment. An appalling irony is that they
are making these recommendations when the federal government
has already been running a deficit for forty-one out of the
last forty-eight years and when that deficit has been reaching
dimensions of $50 billion a year.
An even greater irony is that, not satisfied with following
such disastrous policies at home, our officials have been scolding
other countries, notably Germany and Japan, for not following
these "expansionary" policies themselves. This reminds
one of nothing so much as Aesop's fox, who, when he had lost
his tail, urged all his fellow foxes to cut off theirs.
One of the worst results of the retention of the Keynesian
myths is that it not only promotes greater and greater inflation,
but that it systematically diverts attention from the real causes
of our unemployment, such as excessive union wage-rates,
minimum wage law's, excessive and prolonged unemployment
insurance, and overgenerous relief payments.
But the inflation, though in part often deliberate, is today
mainly the consequence of other government economic interventions.
It is the consequence, in brief, of the Redistributive
State -- of all the policies of expropriating money from Peter in
order to lavish it on Paul.
This process would be easier to trace, and its ruinous effects
easier to expose, if it were all done in some single measure — like
the guaranteed annual income actually proposed and seriously
considered by committees of Congress in the early 1970s. This
was a proposal to tax still more ruthlessly all incomes above
average and turn the proceeds over to all those living below a
so-called minimum poverty line, in order to guarantee them an
income — whether they were willing to work or not—"to enable
them to live with dignity." It would be hard to imagine a plan
more clearly calculated to discourage work and production and
eventually to impoverish everybody.
But instead of passing any such single measure, and bringing
on ruin in a single swoop, our government has preferred to
enact a hundred laws that effect such a redistribution on a
partial and selective basis. These measures may miss some
needy groups entirely; but on the other hand they may shower
upon other groups a dozen different varieties of benefits, subsidies,
and other handouts. These include, to give a random
list: Social Security, Medicare, Medicaid, unemployment insurance,
food stamps, veterans' benefits, farm subsidies, subsidized
housing, rent subsidies, school lunches, public employment
on make-work jobs, Aid to Families with Dependent
Children, and direct relief of all kinds, including aid to the
aged, the blind, and the disabled. The federal government has
estimated that under these last categories it has been handing
federal aid benefits to more than 4 million people—not to count
what the states and cities are doing.
One author has recently counted and examined no fewer
than forty-four welfare programs. Government expenditures
for these in 1976 totaled $187 billion. The combined average
growth of these programs between 1971 and 1976 was 25
percent a year—2.5 times the rate of growth of estimated gross
national product for the same period. Projected expenditures
for 1979 are more than $250 billion. Coincident with the extraordinary
growth of these welfare expenditures has been the
development of a "national welfare industry," now composed
of 5 million public and private workers distributing payments
and services to 50 million beneficiaries.1
Nearly every other Western country has been administering
a similar assortment of aid programs — though sometimes a
more integrated and less haphazard collection. And in order to
do this they have been resorting to more and more Draconian
taxation.
We need merely point to Great Britain as one example. Its
government has been taxing personal income from work
("earned" income) up to 83 percent, and personal income from
investment ("unearned" income) up to 98 percent. Should it be
surprising that it has discouraged work and investment and so
profoundly discouraged production and employment? There is
no more certain way to deter employment than to harass and
penalize employers. There is no more certain way to keep
wages low than to destroy every incentive to investment in new
and more efficient machines and equipment. But this is becoming
more and more the policy of governments everywhere.
Yet this Draconian taxation has not brought revenues to
keep pace with ever more reckless government spending and
schemes for redistributing wealth. The result has been to bring
chronic and growing government budget deficits, and therefore
chronic and mounting inflation, in nearly every country in the
world.
For the last thirty years or so, Citibank of New York has been
keeping a record of this inflation over ten-year periods. Its
calculations are based on the cost-of-living estimates published
by the individual governments themselves. In its economic
letter of October 1977 it published a survey of inflation in fifty
countries. These figures show that in 1976, for example, the
West German mark, with the best record, had lost 35 percent of
1Charles D. Hobbs, The Welfare Industy (Washington, D. C.: Heritage
Foundation, 1978).
its purchasing power over the preceding ten years; that the
Swiss franc had lost 40 percent, the American dollar 43 percent,
the French franc 50 percent, the Japanese yen 57 percent,
the Swedish krone 47 percent, the Italian lira 56 percent, and
the British pound 61 percent. When we get to Latin America,
the Brazilian cruzeiro had lost 89 percent of its value, and the
Uruguayan, Chilean, and Argentine pesos more than 99 percent.
Though when compared with the record of a year or two
before, the overall record of world currency depreciations was
more moderate; the American dollar in 1977 was depreciating
at an annual rate of 6 percent, the French franc of 8.6 percent,
the Japanese yen of 9.1 percent, the Swedish krone of 9.5
percent, the British pound of 14.5 percent, the Italian lira of
15.7 percent, and the Spanish peseta at an annual rate of 17.5
percent. As for Latin American experience, the Brazilian currency
unit in 1977 was depreciating at an annual rate of 30.8
percent, the Uruguayan of 35.5, the Chilean of 53.9, and the
Argentinian of 65.7.
I leave it to the reader to picture the chaos that these rates of
depreciation of money were producing in the economies of
these countries and the suffering in the lives of millions of their
inhabitants.
As I have pointed out, these inflations, themselves the cause
of so much human misery, were in turn in large part the
consequence of other policies of government economic intervention.
Practically all these interventions unintentionally illustrate
and underline the basic lesson of this book. 411 were
enacted on the assumption that they would confer some immediate
benefit on some special group. Those who enacted
them failed to take heed of their secondary consequences—
failed to consider what their effect would be in the
long run on all groups.
In sum, so far as the politicians are concerned, the lesson that
this book tried to instill more than thirty years ago does not
seem to have been learned anywhere.
If we go through the chapters of this book seriatim, we find
practically no form of government intervention deprecated in
the first edition that is not still being pursued, usually with
increased obstinacy. Governments everywhere are still trying
to cure by public works the unemployment brought about by
their own policies. They are imposing heavier and more expropriatory
taxes than ever. They still recommend credit expansion.
Most of them still make "full employment" their
overriding goal. They continue to impose import quotas and
protective tariffs. They try to increase exports by depreciating
their currencies even further. Farmers are still "striking" for
"parity prices." Governments still provide special encouragements
to unprofitable industries. They still make efforts to
"stabilize" special commodity prices.
Governments, pushing up commodity prices by inflating
their currencies, continue to blame the higher prices on private
producers, sellers, and "profiteers." They impose price ceilings
on oil and natural gas, to discourage new exploration precisely
when it is in most need of encouragement, or resort to general
price and wage fixing or "monitoring." They continue rent
control in the face of the obvious devastation it has caused.
They not only retain minimum wage laws but keep increasing
their level, in face of the chronic unemployment they so clearly
bring about. They continue to pass laws granting special
privileges and immunities to labor unions; to oblige workers to
become members; to tolerate mass picketing and other forms of
coercion; and to compel employers to "bargain collectively in
good faith" with such unions—i.e., to make at least some
concessions to their demands. The intention of all these measures
is to "help labor." But the result is once more to create and
prolong unemployment, and to lower total wage payments
compared with what they might have been.
Most politicians continue to ignore the necessity of profits, to
overestimate their average or total net amount, to denounce
unusual profits anywhere, to tax them excessively, and sometimes
even to deplore the very existence of profits.
The anticapitalistic mentality seems more deeply embedded
than ever. Whenever there is any slowdown in business, the
politicians now see the main cause as "insufficient consumer
spending." At the same time that they encourage more consumer
spending they pile up further disincentives and penalties
in the way of saving and investment. Their chief method of
doing this today, as we have already seen, is to embark on or
accelerate inflation. The result is that today, for the first time in
history, no nation is on a metallic standard, and practically
every nation is swindling its own people by printing a chronically
depreciating paper currency.
To pile one more item on this heap, let us examine the recent
tendency, not only in the United States but abroad, for almost
every "social" program, once launched upon, to get completely
out of hand. We have already glanced at the overall picture, but
let us now look more closely at one outstanding example—
Social Security in the United States.
The original federal Social Security Act was passed in 1935.
The theory behind it was that the greater part of the relief
problem was that people did not save in their working years,
and so, when they were too old to work, they found themselves
without resources. This problem could be solved, it was
thought, if they were compelled to insure themselves, with
employers also compelled to contribute half the necessary premiums,
so that they would have a pension sufficient to retire on
at age sixty-five or over. Social Security was to be entirely a
self-financed insurance plan based on strict actuarial principles.
A reserve fund was to be set up sufficient to meet future claims
and payments as they fell due.
It never worked out that way. The reserve fund existed
mainly on paper. The government spent the Social Security tax
receipts, as they came in, either to meet its ordinary expenses or
to pay out benefits. Since 1975, current benefit payments have
exceeded the system's tax receipts.
It also turned out that in practically every session Congress
found ways to increase the benefits paid, broaden the coverage,
and add new forms of "social insurance." As one commentator
pointed out in 1965, a few weeks after Medicare insurance was
added: "Social Security sweeteners have been enacted in each
of the past seven general election years."
As inflation developed and progressed, Social Security
benefits were increased not only in proportion, but much more.
The typical political ploy was to load up benefits in the present
and push costs into the future. Yet that future always arrived;
and each few years later Congress would again have to increase
payroll taxes levied on both workers and employers.
Not only were the tax rates continuously increased, but there
was a constant rise in the amount of salary taxed. In the original
1935 bill the salary taxed was only the first $3,000. The early
tax rates were very low. But between 1965 and 1977, for
example, the Social Security tax shot up from 4.4 percent on
the first $6,600 of earned income (levied on employer and
employee alike) to a combined 11.7 percent on the first $16,500.
(Between 1960 and 1977, the total annual tax increased by
572 percent, or about 12 percent a year compounded. It is
scheduled to go much higher.)
At the beginning of 1977, unfunded liabilities of the Social
Security system were officially estimated at $4.1 trillion.
No one can say today whether Social Security is really an
insurance program or just a complicated and lopsided relief
system. The bulk of the present benefit recipients are being
assured that they "earned" and "paid for" their benefits. Yet no
private insurance company could have afforded to pay existing
benefit scales out of the "premiums" actually received. As of
early 1978, when low-paid workers retire, their monthly benefits
generally represent about 60 percent of what they earned on
the job. Middle-income workers receive about 45 percent. For
those with exceptionally high salaries, the ratio can fall to 5 or
10 percent. If Social Security is thought of as a relief system,
however, it is a very strange one, for those who have already
been getting the highest salaries receive the highest dollar
benefits.
Yet Social Security today is still sacrosanct. It is considered
political suicide for any congressman to suggest cutting down
or cutting back not only present but promised future benefits.
The American Social Security system must stand today as a
frightening symbol of the almost inevitable tendency of any
national relief, redistribution, or "insurance" scheme, once
established, to run completely out of control.
In brief, the main problem we face today is not economic,
but political. Sound economists are in substantial agreement
concerning what ought to be done. Practically all government
attempts to redistribute wealth and income tend to smother
productive incentives and lead toward general impoverishment.
It is the proper sphere of government to create and
enforce a framework of law that prohibits force and fraud. But
it must refrain from specific economic interventions.
Government's main economic function is to encourage and
preserve a free market. When Alexander the Great visited the
philosopher Diogenes and asked whether he could do anything
for him, Diogenes is said to have replied: "Yes, stand a little less
between me and the sun." It is what every citizen is entitled to
ask of his government.
The outlook is dark, but it is not entirely without hope. Here
and there one can detect a break in the clouds. More and more
people are becoming aware that government has nothing to give
them without first taking it away from somebody else—or from
themselves. Increased handouts to selected groups mean
merely increased taxes, or increased deficits and increased
inflation. And inflation, in the end, misdirects and disorganizes
production. Even a few politicians are beginning to recognize
this, and some of them even to state it clearly.
In addition, there are marked signs of a shift in the intellectual
winds of doctrine. Keynesians and New Dealers seem to
be in a slow retreat. Conservatives, libertarians, and other defenders
of free enterprise are becoming more outspoken and
more articulate. And there are many more of them. Among
the young, there is a rapid growth of a disciplined school of
"Austrian" economists.
There is a real promise that public policy may be reversed
before the damage from existing measures and trends has become
irreparable.
THE FIRST EDITION of this book appeared in 1946. It is now, as I
write this, thirty-two years later. How much of the lesson
expounded in the previous pages has been learned in this
period?
If we are referring to the politicians—to all those responsible
for formulating and imposing government policies—practically
none of it has been learned. On the contrary, the policies
analyzed in the preceding chapters are far more deeply established
and widespread, not only in the United States, but in
practically every country in the world, than they were when
this book first appeared.
We may take, as the outstanding example, inflation. This is
not only a policy imposed for its own sake, but an inevitable
result of most of the other interventionist policies. It stands
today as the universal symbol of government intervention
everywhere.
The 1946 edition explained the consequences of inflation,
but the inflation then was comparatively mild. True, though
federal government expenditures in 1926 had been less than $3
billion and there was a surplus, by fiscal year 1946 expenditures
had risen to $55 billion and there was a deficit of $16 billion. Yet
in fiscal year 1947, with the war ended, expenditures fell to $35
billion and there was an actual surplus of nearly $4 billion. By
fiscal year 1978, however, expenditures had soared to $451
billion and the deficit to $49 billion.
All this has been accompanied by an enormous increase in
the stock of money — from $113 billion of demand deposits plus
currency outside of banks in 1947, to $357 billion in August
1978. In other words, the active money supply has been more
than tripled in the period.
The effect of this increase in money has been a dramatic
increase in prices. The consumer price index in 1946 stood at
58.5. In September 1978 it was 199.3. Prices, in short, more
than tripled.
The policy of inflation, as I have said, is partly imposed for
its own sake. More than forty years after the publication of John
Maynard Keynes' General Theory, and more than twenty years
after that book has been thoroughly discredited by analysis and
experience, a great number of our politicians are still unceasingly
recommending more deficit spending in order to cure or
reduce existing unemployment. An appalling irony is that they
are making these recommendations when the federal government
has already been running a deficit for forty-one out of the
last forty-eight years and when that deficit has been reaching
dimensions of $50 billion a year.
An even greater irony is that, not satisfied with following
such disastrous policies at home, our officials have been scolding
other countries, notably Germany and Japan, for not following
these "expansionary" policies themselves. This reminds
one of nothing so much as Aesop's fox, who, when he had lost
his tail, urged all his fellow foxes to cut off theirs.
One of the worst results of the retention of the Keynesian
myths is that it not only promotes greater and greater inflation,
but that it systematically diverts attention from the real causes
of our unemployment, such as excessive union wage-rates,
minimum wage law's, excessive and prolonged unemployment
insurance, and overgenerous relief payments.
But the inflation, though in part often deliberate, is today
mainly the consequence of other government economic interventions.
It is the consequence, in brief, of the Redistributive
State -- of all the policies of expropriating money from Peter in
order to lavish it on Paul.
This process would be easier to trace, and its ruinous effects
easier to expose, if it were all done in some single measure — like
the guaranteed annual income actually proposed and seriously
considered by committees of Congress in the early 1970s. This
was a proposal to tax still more ruthlessly all incomes above
average and turn the proceeds over to all those living below a
so-called minimum poverty line, in order to guarantee them an
income — whether they were willing to work or not—"to enable
them to live with dignity." It would be hard to imagine a plan
more clearly calculated to discourage work and production and
eventually to impoverish everybody.
But instead of passing any such single measure, and bringing
on ruin in a single swoop, our government has preferred to
enact a hundred laws that effect such a redistribution on a
partial and selective basis. These measures may miss some
needy groups entirely; but on the other hand they may shower
upon other groups a dozen different varieties of benefits, subsidies,
and other handouts. These include, to give a random
list: Social Security, Medicare, Medicaid, unemployment insurance,
food stamps, veterans' benefits, farm subsidies, subsidized
housing, rent subsidies, school lunches, public employment
on make-work jobs, Aid to Families with Dependent
Children, and direct relief of all kinds, including aid to the
aged, the blind, and the disabled. The federal government has
estimated that under these last categories it has been handing
federal aid benefits to more than 4 million people—not to count
what the states and cities are doing.
One author has recently counted and examined no fewer
than forty-four welfare programs. Government expenditures
for these in 1976 totaled $187 billion. The combined average
growth of these programs between 1971 and 1976 was 25
percent a year—2.5 times the rate of growth of estimated gross
national product for the same period. Projected expenditures
for 1979 are more than $250 billion. Coincident with the extraordinary
growth of these welfare expenditures has been the
development of a "national welfare industry," now composed
of 5 million public and private workers distributing payments
and services to 50 million beneficiaries.1
Nearly every other Western country has been administering
a similar assortment of aid programs — though sometimes a
more integrated and less haphazard collection. And in order to
do this they have been resorting to more and more Draconian
taxation.
We need merely point to Great Britain as one example. Its
government has been taxing personal income from work
("earned" income) up to 83 percent, and personal income from
investment ("unearned" income) up to 98 percent. Should it be
surprising that it has discouraged work and investment and so
profoundly discouraged production and employment? There is
no more certain way to deter employment than to harass and
penalize employers. There is no more certain way to keep
wages low than to destroy every incentive to investment in new
and more efficient machines and equipment. But this is becoming
more and more the policy of governments everywhere.
Yet this Draconian taxation has not brought revenues to
keep pace with ever more reckless government spending and
schemes for redistributing wealth. The result has been to bring
chronic and growing government budget deficits, and therefore
chronic and mounting inflation, in nearly every country in the
world.
For the last thirty years or so, Citibank of New York has been
keeping a record of this inflation over ten-year periods. Its
calculations are based on the cost-of-living estimates published
by the individual governments themselves. In its economic
letter of October 1977 it published a survey of inflation in fifty
countries. These figures show that in 1976, for example, the
West German mark, with the best record, had lost 35 percent of
1Charles D. Hobbs, The Welfare Industy (Washington, D. C.: Heritage
Foundation, 1978).
its purchasing power over the preceding ten years; that the
Swiss franc had lost 40 percent, the American dollar 43 percent,
the French franc 50 percent, the Japanese yen 57 percent,
the Swedish krone 47 percent, the Italian lira 56 percent, and
the British pound 61 percent. When we get to Latin America,
the Brazilian cruzeiro had lost 89 percent of its value, and the
Uruguayan, Chilean, and Argentine pesos more than 99 percent.
Though when compared with the record of a year or two
before, the overall record of world currency depreciations was
more moderate; the American dollar in 1977 was depreciating
at an annual rate of 6 percent, the French franc of 8.6 percent,
the Japanese yen of 9.1 percent, the Swedish krone of 9.5
percent, the British pound of 14.5 percent, the Italian lira of
15.7 percent, and the Spanish peseta at an annual rate of 17.5
percent. As for Latin American experience, the Brazilian currency
unit in 1977 was depreciating at an annual rate of 30.8
percent, the Uruguayan of 35.5, the Chilean of 53.9, and the
Argentinian of 65.7.
I leave it to the reader to picture the chaos that these rates of
depreciation of money were producing in the economies of
these countries and the suffering in the lives of millions of their
inhabitants.
As I have pointed out, these inflations, themselves the cause
of so much human misery, were in turn in large part the
consequence of other policies of government economic intervention.
Practically all these interventions unintentionally illustrate
and underline the basic lesson of this book. 411 were
enacted on the assumption that they would confer some immediate
benefit on some special group. Those who enacted
them failed to take heed of their secondary consequences—
failed to consider what their effect would be in the
long run on all groups.
In sum, so far as the politicians are concerned, the lesson that
this book tried to instill more than thirty years ago does not
seem to have been learned anywhere.
If we go through the chapters of this book seriatim, we find
practically no form of government intervention deprecated in
the first edition that is not still being pursued, usually with
increased obstinacy. Governments everywhere are still trying
to cure by public works the unemployment brought about by
their own policies. They are imposing heavier and more expropriatory
taxes than ever. They still recommend credit expansion.
Most of them still make "full employment" their
overriding goal. They continue to impose import quotas and
protective tariffs. They try to increase exports by depreciating
their currencies even further. Farmers are still "striking" for
"parity prices." Governments still provide special encouragements
to unprofitable industries. They still make efforts to
"stabilize" special commodity prices.
Governments, pushing up commodity prices by inflating
their currencies, continue to blame the higher prices on private
producers, sellers, and "profiteers." They impose price ceilings
on oil and natural gas, to discourage new exploration precisely
when it is in most need of encouragement, or resort to general
price and wage fixing or "monitoring." They continue rent
control in the face of the obvious devastation it has caused.
They not only retain minimum wage laws but keep increasing
their level, in face of the chronic unemployment they so clearly
bring about. They continue to pass laws granting special
privileges and immunities to labor unions; to oblige workers to
become members; to tolerate mass picketing and other forms of
coercion; and to compel employers to "bargain collectively in
good faith" with such unions—i.e., to make at least some
concessions to their demands. The intention of all these measures
is to "help labor." But the result is once more to create and
prolong unemployment, and to lower total wage payments
compared with what they might have been.
Most politicians continue to ignore the necessity of profits, to
overestimate their average or total net amount, to denounce
unusual profits anywhere, to tax them excessively, and sometimes
even to deplore the very existence of profits.
The anticapitalistic mentality seems more deeply embedded
than ever. Whenever there is any slowdown in business, the
politicians now see the main cause as "insufficient consumer
spending." At the same time that they encourage more consumer
spending they pile up further disincentives and penalties
in the way of saving and investment. Their chief method of
doing this today, as we have already seen, is to embark on or
accelerate inflation. The result is that today, for the first time in
history, no nation is on a metallic standard, and practically
every nation is swindling its own people by printing a chronically
depreciating paper currency.
To pile one more item on this heap, let us examine the recent
tendency, not only in the United States but abroad, for almost
every "social" program, once launched upon, to get completely
out of hand. We have already glanced at the overall picture, but
let us now look more closely at one outstanding example—
Social Security in the United States.
The original federal Social Security Act was passed in 1935.
The theory behind it was that the greater part of the relief
problem was that people did not save in their working years,
and so, when they were too old to work, they found themselves
without resources. This problem could be solved, it was
thought, if they were compelled to insure themselves, with
employers also compelled to contribute half the necessary premiums,
so that they would have a pension sufficient to retire on
at age sixty-five or over. Social Security was to be entirely a
self-financed insurance plan based on strict actuarial principles.
A reserve fund was to be set up sufficient to meet future claims
and payments as they fell due.
It never worked out that way. The reserve fund existed
mainly on paper. The government spent the Social Security tax
receipts, as they came in, either to meet its ordinary expenses or
to pay out benefits. Since 1975, current benefit payments have
exceeded the system's tax receipts.
It also turned out that in practically every session Congress
found ways to increase the benefits paid, broaden the coverage,
and add new forms of "social insurance." As one commentator
pointed out in 1965, a few weeks after Medicare insurance was
added: "Social Security sweeteners have been enacted in each
of the past seven general election years."
As inflation developed and progressed, Social Security
benefits were increased not only in proportion, but much more.
The typical political ploy was to load up benefits in the present
and push costs into the future. Yet that future always arrived;
and each few years later Congress would again have to increase
payroll taxes levied on both workers and employers.
Not only were the tax rates continuously increased, but there
was a constant rise in the amount of salary taxed. In the original
1935 bill the salary taxed was only the first $3,000. The early
tax rates were very low. But between 1965 and 1977, for
example, the Social Security tax shot up from 4.4 percent on
the first $6,600 of earned income (levied on employer and
employee alike) to a combined 11.7 percent on the first $16,500.
(Between 1960 and 1977, the total annual tax increased by
572 percent, or about 12 percent a year compounded. It is
scheduled to go much higher.)
At the beginning of 1977, unfunded liabilities of the Social
Security system were officially estimated at $4.1 trillion.
No one can say today whether Social Security is really an
insurance program or just a complicated and lopsided relief
system. The bulk of the present benefit recipients are being
assured that they "earned" and "paid for" their benefits. Yet no
private insurance company could have afforded to pay existing
benefit scales out of the "premiums" actually received. As of
early 1978, when low-paid workers retire, their monthly benefits
generally represent about 60 percent of what they earned on
the job. Middle-income workers receive about 45 percent. For
those with exceptionally high salaries, the ratio can fall to 5 or
10 percent. If Social Security is thought of as a relief system,
however, it is a very strange one, for those who have already
been getting the highest salaries receive the highest dollar
benefits.
Yet Social Security today is still sacrosanct. It is considered
political suicide for any congressman to suggest cutting down
or cutting back not only present but promised future benefits.
The American Social Security system must stand today as a
frightening symbol of the almost inevitable tendency of any
national relief, redistribution, or "insurance" scheme, once
established, to run completely out of control.
In brief, the main problem we face today is not economic,
but political. Sound economists are in substantial agreement
concerning what ought to be done. Practically all government
attempts to redistribute wealth and income tend to smother
productive incentives and lead toward general impoverishment.
It is the proper sphere of government to create and
enforce a framework of law that prohibits force and fraud. But
it must refrain from specific economic interventions.
Government's main economic function is to encourage and
preserve a free market. When Alexander the Great visited the
philosopher Diogenes and asked whether he could do anything
for him, Diogenes is said to have replied: "Yes, stand a little less
between me and the sun." It is what every citizen is entitled to
ask of his government.
The outlook is dark, but it is not entirely without hope. Here
and there one can detect a break in the clouds. More and more
people are becoming aware that government has nothing to give
them without first taking it away from somebody else—or from
themselves. Increased handouts to selected groups mean
merely increased taxes, or increased deficits and increased
inflation. And inflation, in the end, misdirects and disorganizes
production. Even a few politicians are beginning to recognize
this, and some of them even to state it clearly.
In addition, there are marked signs of a shift in the intellectual
winds of doctrine. Keynesians and New Dealers seem to
be in a slow retreat. Conservatives, libertarians, and other defenders
of free enterprise are becoming more outspoken and
more articulate. And there are many more of them. Among
the young, there is a rapid growth of a disciplined school of
"Austrian" economists.
There is a real promise that public policy may be reversed
before the damage from existing measures and trends has become
irreparable.
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