Crony Capitalism and the American Welfare State: Joined at the Hip
Remnant Review
October 1 is the day of the new fiscal year of the United States government. Little known to the general public, it is the supreme day of celebration for the American Establishment. Let me explain why. It has to do with government spending, specifically this: Who wins? Who pays?
The American welfare state is generally supported by the very rich. They clean up by means of the welfare state. Why? Because the welfare state is seen by political liberals as justifying the expansion of the federal government, and the federal government then protects the interests of the super rich. This has gone on for so long that it is astounding to me that the chattering class -- mostly Leftists -- does not understand it.
Leftist Democrats constantly lobby for more welfare state programs. They think the rich will pay for them. To see why this is silly, look at this pie chart on federal spending. Ask yourself: Who wins? Who pays?
Look at net interest payments. Do you think that money goes to the rich? What does the U.S. government pay? Under 3% a year. The super rich do not buy such low-paying investments. Who does? Retirement funds, insurance companies, money market funds, and banks. This rate of return is for the middle-classe. The interest rate returns after taxes do not keep up with price inflation. Who pays? The rich pay a good chunk of it as taxpayers. They do not care. Why not? Because this level of federal debt guarantees a huge federal government. With the government-enforced restricted-access profits they make, it's just a cost of doing business.
Now let's look at the biggies: Social Security and Medicare/Medicaid. They constitute 45% of federal spending. Who pays? Working stiffs. The Social Security taxable salary cutoff is about $110,000 a year. So, the worker and his employer pay about $16,000 a year, max. For the super rich, this tax is irrelevant -- invisible.
Do you see what the voters have done? They have created two gigantic, politically untouchable welfare programs that the working class finances. These programs are so huge that no new major spending program will be imposed. They have put a ceiling on the growth of the welfare state. The welfare state cannot touch them. They are now immune.
ObamaCare? The workers will pay. Small business owners will pay.
How about food stamps, called SNAP? This costs $75 billion a year. Who gets this money? Agribusiness. In short, food stamps are a subsidy to the super rich in the name of helping the poor.
The income tax was a problem, which went from 25% in the 1920s to 63% in 1932, to 79% in 1936, to 94% in 1944. Truman took it back to 91% in 1948, where it stayed until Kennedy, who got Congress to drop it to 70%. Reagan got it lowered in stages to 28% in 1988. No President since has got it above 40%.
We know that Americans will not accept federal taxes above 20% of GDP. In 1944, in World War II, it got to 20.8%. That was the top. So, the voters have placed a ceiling on total taxation. The federal government is at that ceiling. New programs must come from borrowing. When that gets cut off at low rates, as it will at some point, the welfare state will go belly-up, except for payments to oldsters.
The Left has shot its wad politically. There is no extra federal money to tap. The oldsters lay claim to the federal government's biggest welfare programs, and these programs are paid for by the working class, not the rich.
THE RICH GET RICHER
Over the last generation, people in the top 1% of income have seen their incomes rise, year after year (except in 2008-9). The man in the street has seen no significant increase. In terms of household income, a family in 1988 was doing as well as a family does today, adjusted for price inflation.
Did we elect Clinton? Yes. What welfare program did he get passed? None. Did we elect Obama? Yes. He gave us ObamaCare. It is not paid for by the rich. Did Bush II impose the biggest welfare state program since 1965? Yes. That was the prescription drug bill. It is not paid for by the rich.
The American welfare state is not paid for by the rich. Yet the call is always the same in Left wing circles" "Make the federal government bigger. Get the government to redistribute wealth." These people are slow learners.
Leftists are unbelievably naïve poltically. They do not understand that this system was designed by the super rich, and it has been justified in the name of helping the poor. The goal of the super rich is to expand the power of the federal government, which they know they control most of the time. They have had control since at least the election of McKinley in 1896. I think they have had control ever since the election of Abraham Lincoln. They benefit from the expansion of the federal government. If they can just keep marginal tax rates low, they clean up. They have done this since Kennedy's day. Democrats have not been able to get pre-Reagan rates back.
As the federal government grows, the rich get much richer. The poor also get a little richer: capitalism's effect. Generally, the middle class gets a little richer. But the rich get richest of all, and they get rich more steadily. The basis of wealth creation is entrepreneurship. The basis of keeping your wealth after you get very rich is the creation of restrictions against new entrepreneurs coming in and competing against you. This was understood by the late 19th century, and after 1887, the super rich in the United States systematically pursued the expansion of the federal government, because a larger federal government could regulate more of the economy. In 1887, Congress created the Interstate Commerce Commission. That was the beginning of the regulatory system that has protected the super rich ever since. The Progressive movement expended this after 1896: the election of McKinley. It accelerated under three Progressives: Teddy Roosevelt, Taft, and Wilson. It slowed under non-Progressives Harding and Coolidge. It accelerated again under Progressive Hoover. Then came Franklin Roosevelt, the former Wall Street bond salesman. (Antony Sutton, Wall Street and FDR.)
This political and economic connection between regulation and the protection of the super rich has been known for half a century. In 1963, the New Left historian Gabriel Kolko wrote a book about it: The Triumph of Conservatism. He showed how the regulatory apparatus of the federal government was promoted by the rich, who were supposed to be the targets of the regulation. But for 50 years, the Left has not figured out that this is the name of the game. Neither has the Right, except for a handful of free market economists and Rothbard libertarians.
There's no indication that David Rockefeller or other members of the super rich are in any way opposed to the expansion of the welfare state. They promote the welfare state. The World Economic Forum, which is the annual assembly of the super rich who control so much of the world's wealth, always invites the social gospel political organizer Jim Wallis to give a presentation. Why is that? Because his presentations assuage the guilt of the wealthy, and his programs, even if enacted, would only strengthen the hand of the federal government. By giving moral support to a few hundred billion dollars a year for the poor out of a $3.5 trillion federal budget, the super rich gain legitimacy for an expanded federal government. An expanded federal government is what keeps them rich.
What terrifies the super rich is laissez-faire. If the government shrank back to where it was before 1900, the super rich would have to compete. They would find that more difficult to do than capturing the federal government. All of the talk about wealth redistribution for the last century has led to a system in which the super rich run the show economically. You would think that liberals would learn, but they don't. Rhetoric is what matters; the facts do not matter.
This is matched on the other side by conservatives, who are convinced that the rise of the welfare state is a threat to the rich. They cannot understand how the system has worked for a hundred years. They cannot figure out that the super rich are in favor of the liberal, federal government expanding programs that the left wing of the Democratic Party promotes. The super rich, being super rich, are willing to pay taxes when they want to, or put the money in foundations when they don't want to. In either case, they retain their enormous wealth. They increase their share of this wealth. Yet has has all been done by means of the expansion of the welfare state.
When will people finally figure out the name of this game? The name of the game is to expand the federal government in the name of helping the poor, throwing a few hundred billion dollars a year to the poor, and creating barriers to entry which protect the super rich. Once you've got it, you get to keep it, if you are super rich. The free market would not let you keep it unless you innovate, but the free market is not allowed to operate at the top. That pleases the left wing of the Democratic Party, and it also pleases the super rich.
Crony capitalism favors the super rich. The super rich are willing to pay income taxes to fund a small portion of the welfare state, because the bulk of the welfare state is funded by taxes on the middle class. The super rich don't pay much into Social Security and Medicare/Medicaid. The working class pays: "regressive" taxation. These are the largest welfare programs there are. The super rich avoid having to pay much of anything into the two largest welfare state programs there are. It is a sweet deal for the super rich. The federal government's regulatory apparatus keeps growing, and the super rich's balance sheets keep growing.
Consider how this system works. Consider it from the point of view of national politics. The Establishment deals with the conservative movement by continuing to expand the defense budget. As long as politicians are willing to vote to expand the Defense Department's budget, they are going to get the support, however grudging, of the conservative movement. The conservatives want guns, not butter.
The conservatives are not about to challenge Social Security and Medicare/Medicaid. They have paid into it, they are determined to get the money. The Tea Party movement would blow up overnight if there were any systematic effort to call for a default on Social Security and Medicare. Politically, this is exactly what the Establishment wants. This guarantees that Social Security and Medicare will continue to get the lion's share of all welfare spending by the federal government. That means that the rich will not have to pay for either program. That will come out of the hides of the working class.
The Establishment knows these programs are going to go belly-up. The senior facilitator of the Establishment from 1985 to 2007 was Peter G. Peterson. Peterson was chairman of the Council on Foreign Relations. He is also a multi-billionaire. He understands that the two programs are going to bankrupt the federal government. He has been warning about this for three decades. He sees that working-class people are going to wind up the big losers, because at some point, the federal government simply will not be able to make the payments. But he also knows that, politically speaking, there is no possibility that these programs will be cut back before they die. He has experienced that opposition for over 20 years. But he has not called for the abolition of these programs, only for reductions in the benefits. He has gotten nowhere. No politician dares recommend any cuts.
The Establishment pays into the programs for oldsters: token payments -- chump change. They are not dependent on these programs. They will not get the blame for their demise. It is a win-win deal for them. It is a welfare system that is not financed by rich people, yet it provides legitimacy for the regulatory state that protects Wall Street, not Main Street.
The Establishment is worried about the bankruptcy of the federal government, for this reason: they need the federal government to protect them from competition from innovative entrepreneurs who will undermine their profitability. So, they don't want the federal government to go belly-up. It would lose too much legitimacy. But the actuarial genie has long been out of the bottle. In 1935, Franklin Roosevelt got the Social Security system through a compliant Congress. In 1965, Lyndon Johnson got Medicare through a compliant Congress. Those two programs guarantee either the bankruptcy of the United States government or else program cutbacks on a massive scale. Either outcome will undermine the government's legitimacy. But cutbacks in the two programs are not going to hurt the super rich directly. These people are not dependent upon these two programs to support them in their old age. As to who's going to pay, they don't know, and they don't really care. It will not be them. They don't know which political faction is going to be supreme: oldsters or workers. They don't know if the oldsters will keep the system going longer at the expense of younger workers. It is irrelevant to them. What is relevant is this: they will not suffer in either case.
THE ESTABLISHMENT'S SUPREME POLITICAL BAIT-AND-SWITCH
This is the greatest single irony of the liberal Establishment's version of the welfare state. It was never funded by the rich. It was funded by the working class on a flat-tax basis. The super rich have watched in amusement as the Left invoked wealth-redistribution by the state. The system left the rich untouched. It stripped the Left of all of the political capital it had. The Left will never get another shot at the rich in the United States. "Close, but no cigar."
I don't recall anybody else in the conservative movement commenting on this reality of the modern welfare state. I have heard a few critics say that Ronald Reagan was unwilling to stop the expansion of these welfare programs, and in doing so, he made it impossible for any new major welfare programs to be passed. But this ceiling was operational long before Ronald Reagan showed up. From the beginning of the Social Security system, it was geared to payments from workers. Franklin Roosevelt insisted on this. He realized that if he could get the monthly payments into the system, the voters would never pull out of the system. They would understand that they had paid into it, and they would demand to be paid. "It's our money!" That guaranteed the political survival of the system. It also guaranteed that Roosevelt's class, the super rich, would not be touched by the system.
Roosevelt was the pampered son of a rich mother. He went to Harvard. After he lost in his bid to become Vice President in 1920, he worked for the next eight years as a bond salesman to the super rich. You never find that in the textbooks. His rhetoric, beginning with his first inaugural address, pilloried the very class which had produced him, financed him, and would continue to advise him. It was under Roosevelt that the Council on Foreign Relations first became influential in supplying presidential advisers.
Consider ObamaCare. It is not a threat to the super rich. This is why they don't oppose it. It is not going to be paid for by them. If they have to pay their workers a little extra money here and there, they will lock in their positions. ObamaCare is going to come at the expense of small business, and moderately sized businesses that will now have less opportunity to become big businesses. ObamaCare will help to lock in place the existing distribution of corporate wealth. The large, established companies always have the advantage with increasing regulation. This stifles competition. They are willing to pay more money to the federal government for regulatory intervention, because they can then establish something like a monopoly within the existing markets. They have known this since 1887, but the conservatives don't understand it, and neither do the liberals.
Crony capitalism removes the most important threat to the Establishment, namely, the threat of free market competition. It makes certain that existing large firms have the advantage. The existing large firms can afford the high-powered and highly expensive legal talent to make the system work for them. This locks out competitors whose only advantage is that they can serve the customer more efficiently. That doesn't count, because federal regulation makes it illegal for these firms to serve the customer.
From the point of view of the Establishment, the cost of the welfare state is chump change. The two big kahunas of the welfare state, Social Security and Medicare/Medicaid, are financed by the working class. So, they are no sweat off the brows of the super rich. These two programs make it impossible to expand any other major welfare programs. Even if we think of ObamaCare as such a program, it still serves the interests of the super rich, because it will make it more difficult for smaller firms to compete. Once you've established the dominant position in the market, you can afford lots of regulation. Regulation becomes a gigantic barrier to entry that is placed in front of your potential competitors.
The political Left sees that the rich are getting richer, and its response is always the same: more welfare state. They don't understand that the federal government is what has created the existing distribution of income, which favors the super rich. They don't learn that welfare state politics makes things worse for the poor. They have been barking up the wrong tree ever since 1896, when William Jennings Bryan got his first nomination by the Democratic Party for President. His candidacy killed the old Democracy, best represented by Grover Cleveland, a limited-government vision of politics, and firmly committed to low tariffs and the gold standard. It did not survive Bryan's three runs for the presidency.
The Left wants more welfare programs, but the Left is not going to get them. The Left wants high taxes on the rich, but if they did not get that during Obama's first term, when the Democrats controlled both houses of Congress, they are unlikely ever to get it again. We are seeing the last hurrah for the Democratic Left. Even if they were to win both houses of Congress and the presidency in 2016, the cupboard is now bare. In any case, that is not how power works in the United States. It works by stealth behind the scenes, and this has been going on since 1896. It is not going to change. It has only accelerated over the years. The Great Depression and World War II solidified the system.
Social Security and Medicare/Medicaid are guarantees that the welfare state, as proposed by the Democratic Left, will never come into existence. If there is any welfare money left to spend, granny is going to get it, and the working class is going to put up the funds. These were the greatest political bait-and-switch scams in American history. In the name of soaking the rich, the middle class and the poor created a welfare state funded by them. The rich walked away from the trap laid for them by their political enemies.
From the day that the poor little rich boy Franklin Roosevelt signed Social Security into law in 1935, the American Establishment has looked down from its penthouse on the assembled masses in the streets below, and has said three words: "You dumb clucks."
Exactly 30 years later, the poor boy turned rich boy Lyndon Johnson signed Medicare. He thought he was getting even with all those Harvard snobs. And they responded, behind closed doors -- doors he could never get through: "We got you, too, you uppity Texas dirt farmer." And they had.
CONCLUSION
The welfare state is the ally of the super rich. It costs them little. It justifies the federal government. The federal government is the source of the protection that the super rich enjoy. Crony capitalism's ally is the welfare state.
The Left does not see this. The Right does not see this. The Establishment sees it. The Establishment repeats its mantra behind closed doors at 12:01 a.m. every October 1: the beginning of Washington's fiscal year. "You dumb clucks."