The Creeping Socialist State

Property rights and the rule of law are essential foundations for a vibrant economy. When they are threatened, or uncertain, the result is inefficiency, a larger underground economy, capital flight, and rent-seeking (the process of using one’s assets and resources to increase one’s share of existing wealth without actually creating new wealth).

In today’s creeping socialist state, individual rights to capital, land and the fruits of one's labor are threatened—in many cases redistributed from creditors to debtors, from those who don’t have political power (owner/managers) to those increasing in power (voters who do not own anything), and especially from young to old. And a much larger battle is looming.

Nine years ago the Supreme Court gutted the Constitution's "public use" restriction on eminent domain (Kelo v. City of New London, 2005), allowing local governments to take the property of some individuals for the benefit of others, especially private developers. So much for property rights!

The biggest future threat will be to the fruits of one's labor. The unfunded liabilities of Social Security and Medicare are now several times the national debt; the unfunded liabilities of state and local governments for pensions and other benefits are in the trillions of dollars and mounting. The panoply of other government programs nonetheless continues to expand. The result, according to Congressional Budget Office projections, is that federal spending will reach 36% of GDP in a generation. This implies that taxes will have to double from the current, near-historic average, 18% of GDP. All federal taxes will increase—on income, capital gains, dividends, corporate earnings, employer and employee payrolls.

As economic growth has slowed and the population has aged, the ratio of people receiving government benefits to those paying taxes has been rising rapidly. Social Security and Medicare are the two big government wealth-transfer programs. Spending on these two and other entitlement programs will gobble up bigger and bigger chunks of the federal budget. They are already crowding out defense.

There is a widespread belief that Social Security payments are due to the people in a legal, contractual sense. In other words, many Americans believe that the money they have put into Social Security will be paid back to them when they retire; and the government is obliged by law to pay them that money. Politicians feed this belief to the people; but it is false. As far back as 1960 the Supreme Court (Flemming v. Nestor) ruled that benefits can be changed by Congress at any time—and they have been. In the recent past, the age for collection of full Social Security payments has been raised from 65 to 67 years of age. Payments are coming later and less. The growth of retirement benefits will have to be slowed. The notion that people not yet born "own" Social Security benefits in the future is a fairy tale.

It seems likely that benefits for the more affluent among us will be reduced first by our government in an attempt to bring Social Security benefits into a situation where they are payable. To bureaucrats, it makes no sense to diminish the income of wealthy people through taxation in their most productive years, only to subsidize them heavily a few years later by paying them Social Security benefits. The government would like to simply keep the incoming tax money and diminish the pay-out of Social Security benefits. On the other hand, it seems unjust to the workers to take money away from them with the promise that that money will be used for their retirement and then deny those payments later when the worker needs the money.

Despite the recent hikes in taxes on income, dividends and capital gains, many on the left are clamoring for more: an 80% top income-tax rate and even a progressive global wealth tax with rates as high as 10%. This is exactly the wrong road to take. Such taxes will only discourage production, encourage black markets, raise far less revenue than proponents claim and—by curtailing capital accumulation—lower future wages and living standards. Over time, such rates would expropriate a sizable fraction of wealth.

Ultimately, behind this and other attacks on property rights is the notion that the government owns all income, leaving to you only what it doesn't demand. But as President Reagan said in July 1987, "working people need to know their jobs, take-home pay, homes, and pensions are not vulnerable to the threat of a grandiose, inefficient, and overbearing government." In particular, taxation "beyond a certain level becomes servitude. And in America, it is the Government that works for the people and not the other way around."

Someone has said, “A democracy will last only until the people learn that they can vote themselves benefits.” I greatly fear that the progressive philosophy being trumpeted by President Obama and the Democrat Party will sink this nation under the waves.

(This blog post was redacted from an op-ed by Michael Boskin, Wall Street Journal 7/16/14.)