By Bill Bonner
The tweet was never sent and never received
[su_quote]Lying Otto von Bismarck set us up for bankruptcy! What was he thinking? Sad!![/su_quote]
Instead, Mr. Trump said last weekend that, far from trying to curb the promises and cut the costs of the welfare state, he was nearly ready to unveil a plan to replace Obamacare with something better: a plan that would provide insurance for everybody.
Impossible bills
The liberal and illiberal elites are still trying to figure it out: Isnt that what Hillary was planning? The Obama team like the Bushes and Clintons before it had already run up impossible bills at taxpayers expense and offered all manner of unaffordable benefits. Now, explained former Fed Chairman Alan Greenspan in his private conversation with us here in Baltimore yesterday, entitlements are out of control. The system set up by German Chancellor Otto von Bismarck in the 19th century is going broke in the 21st.
Otto von Bismarck, the father of 21st-century debt | Picture Courtesy: Civilization WikiAfter the French Revolution, the elites of Europe realised they had to make peace with the people. This they did, with Bismarck taking the lead, by promising people more in social welfare benefits than they paid in taxes. The difference between what they paid and what they got would come from two sources. First, it would come from the rich, who would pay higher rates. Second, it would come from the next generation.
Goldilocks rate
As to the first, the elites ran into a problem. They were the rich. They didnt want to raise taxes on themselves! And along came economist Arthur Laffer with a handy theory explaining why they shouldnt. Laffer claimed there was a Goldilocks rate not too high, not too low at which the feds would collect the maximum amount of revenue.
A 100% marginal tax rate discouraged the rich from earning more money. A 0% marginal rate left the government with no revenue. The ideal rate must lie somewhere in between.
Besides, there really arent that many rich people after all. And they tend to be hard to pin down. The art of taxation, former French Finance Minister Jean-Baptiste Colbert had explained in the 17th century, consists of plucking the goose to get the most feathers with the least amount of squawking.
The rich tended to squawk. And since they were also the elite who controlled the system, their squawks were backed by campaign cash their pain was felt and tax rates at the top were brought down.The presumed optimal tax rate, here in Baltimore at least, is right in the middle, between all and nothing at 50%.
The second source of revenue was the more important one. From 1850 until today, each successive generation was reliably richer and bigger than the one before it. For example, according to The Wall Street Journal, in 1970, 92% of 30-year-old Americans earned more than their parents at the same age. But that source of funding is drying up. The Journal was reporting on a new study undertaken by Harvard, Stanford, and the University of California. The same study found that only about half of 30-year-olds today earn more than their parents.
The laffer curve, which gives an optimum tax rate which maximizes tax revenue | Picture Courtesy: Manasupaluku’s BlogIn other words, this generation has made no financial progress compared to the previous one. And taking just men, the situation is worse: Out of 10 30-year-old men, only four earned more than their fathers in 2014.
Headed for bankruptcy
These results are based on government statistics, which we dont trust for a minute. So, we will do our own calculation, reduced to the simplest terms. A working man needs a pickup truck. How many hours of work does he need to buy one? In 1970, the basic pickup cost 948 hours of work at the prevailing wage at the time. By 2016, it took 1,190 hours of shoulder-to-the-wheel labour to buy it 25% more.
[su_pullquote]Few people realise that Bismarcks model of government is already headed for bankruptcy.[/su_pullquote]
Few people realise that Bismarcks model of government is already headed for bankruptcy. The U.S. federal debt will top $20 trillion this month. Over the next decade if there are no tax cuts and no spending increases it will rise to $30 trillion. So far, the money still flows to the baby boomers. And the evidence of impending doom is hidden by record-low lending rates.
But the feds are no longer counting on the next generation to make the welfare state work; theyre sending the bills to a future generation that has not even been born yet. What they will do when they get the bill, no one knows. I dont know how this is going to end, Dr. Greenspan told us gloomily.
None of this was probably obvious to the average Trump voter. And maybe not even to Citizen Trump. But it will be soon.
Bill Bonner is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora, Inc., as well as a co-founder of Bonner & Partners publishing.
This article was originally published on EconMatters
Featured Image Source: Pixabay
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