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The future of the nanny state: Get ready for more intervention


In the next 11 years, the scope of the state will be redefined in many countries.  This is partly because of the recent debt/financial turmoil, a very dark cloud which has had one silver lining (if you can call it that): it finally revealed for all to see that many governments are nearly bankrupt.  Why is this good?  Because finally, it may focus some minds on actually solving the problem.

Governments in financial trouble may yet stave off actual failure, and let’s hope they do.  But there is no point in even pretending that over the next decade, they will be able to afford the entitlements due to the increasing numbers of pensioners, healthcare and welfare recipients, plus salaries and benefits to government employees, plus the myriad other programs and subsidies that governments have such a knack for creating.

How big is the problem?  In the USA, for example, unfunded government liabilities currently amount to $120 trillion.  That’s about double the value of the total private net worth of all 300 million Americans.

When it comes to restoring fiscal probity, there are three basic options, as everybody knows: raise taxes, reduce spending, or borrow.  (The fourth option, default, has nothing to do with restoring probity.)

In the next 11 years, which of these option(s) will governments rely on as their primary way out of the woods?  In several countries, the battle lines have been drawn for a long time, and it may seem that the fight between left and right over this issue is a never-ending war.  But I believe we will be able to declare a winner as the decade plays out.

The “big government” left, in favor of centralized, state-managed solutions, insists that entitlements must be continued.  (If they are not, “seniors will die!”)  How to pay for all the programs, subsidies, entitlements and goodies?  Easy! Just get “the rich” to pay more taxes.


And in this corner…

Meanwhile, the “small government” right, in favor of more private-sector solutions, insists that raising taxes is definitely not the answer, as that only stifles economic growth – the one thing with the potential, in the fullness of time, to restore the whole situation to a sustainable equilibrium.  Borrowing should also be avoided, they say, because at best it can provide a short-term fix, but adds to future liabilities. That leaves only one option: reduce spending.

The only fiscally responsible way out of the mess, says the right, is to cut back on unsustainable government payments, benefits and programs.  Privatize them, downsize them, or drop them altogether.

Confrontations between the two sides are ugly… and getting uglier.  In 2010, for example, demonstrations in Greece against the government’s proposed austerity measures (including public sector wage cuts and pension reductions) resulted in three deaths when a firebomb was thrown into a bank.  In many other places, the left and right are facing off, seemingly on the very edge of violence.


 


What will happen in the next decade?

I believe polarization between the two camps will increase, at least for a few more years.  Eventually, however, the “small government” side will prevail.  Why?

Two scenarios will play out in the next 11 years that will serve as a wake-up call to the left:

First, a high-profile municipality – for example a city like Los Angeles or New York – will substantially raise taxes on corporate earnings and “wealthy” individuals.  The result will be an immediate flight from the city of several highly profitable companies and hundreds of top-earning individual taxpayers and their families.

Instead of increasing, tax revenues for the city will plummet.  The city government will then face a humiliating and very visible climb-down, and try to re-establish the old tax rates.  But it will be too late.  These companies, and these highly successful taxpayers, will not be going back.

For more thoughtful politicians on the left, this episode – and in fact, there may be more than only one – will help them see the futility of treating the most productive segments of society as mere cows to be milked.  Having seen the light, these politicians may finally begin to agree that another approach is necessary.

Second, there will be another high-profile municipality somewhere - a major city or perhaps even an entire country - that will go to the wall financially, and this time, it will not be bailed out.  Technically, it will be bankrupt, unable to meet obligations (in particular, think government pensions), its debt worth pennies on the dollar, and if it is a country, its currency unwanted and its exchange rate dropping through the floor.

After this sobering event, what the world will witness over the following three or four years will be an exodus from that city/country of a significant proportion of its talent and potential – an unaffordable loss of human capital.  This will essentially condemn it to an oblivion lasting at least a generation.

Here’s why.  In such a place, there is simply no future for any young professionals with talent or promise:

  • First, they will be trying to make a career in an economy that is permanently ailing, suffering from persistent unemployment, high inflation, weak international trade prospects, a degraded currency, price instability, and probably political instability as well.
  • Second, the government will need to raise all the revenue it can, so they will find themselves taxed to the hilt.
  • Third, the environment for any kind of entrepreneurial activity will be dismal.  Capital will be almost impossible to obtain, labor (in spite of high unemployment) will be surly and confrontational, and profits will practically be confiscated by the government.
  • Fourth, anyone who manages to be successful despite all these obstacles will be the object of society’s resentment, not its pride or admiration.
  • Fifth, public education and other government-provided services will face deep cuts, so their kids will also suffer.
  • Sixth, there will be an increase in violent crime (possibly coupled with a reduction of police capabilities).
  • Lastly, when these high-potential individuals think about the long-term outlook for their children in this country, their mental picture of the future will conjure up nothing but meager employment chances, high taxes, corruption and frightening personal security issues.  Not exactly the “land of opportunity.”

The result: emigration by anybody who can get out.  Why would anyone with talent or ambition (not to mention a family to raise) want to stay?

 

Whew! "Only" 20% of young Singaporeans want to leave the country.


This brain drain will mean that the country in question will suffer from an even more acute shortage of talent than the alarming demographic trends already indicate. When promising young people up and leave, an important part of the country’s future goes with them: its future professionals such as doctors, lawyers, engineers, teachers… its future entrepreneurs and creators of wealth… its future management cadre… its future consumers… and its future taxpayers.  All gone.  And, if you look at this from a competitive point of view, all ultimately contributing their talent and energy to the success of some other country.

If this were to happen, cities like London or Toronto or Sydney will welcome these talented émigrés with open arms.  A vibrant enclave of ambitious, hard-working, well educated expats from this country will take root in one or more of these cities, building a community much like the Iranians in Los Angeles who left Iran after the Khomeini revolution in 1979.

It’s an ill wind that blows nobody good.


The Swiss model

Let’s return now to our “more thoughtful politicians” on the left.  For them, these two events will simply change their minds.  They will back off from any policies that might chase productive people away.  “We need them here!” they will say.  And when this realization dawns, then “small government” solutions will be preferred to “big government” ones.

One clever way, however, for politicians to embrace small government solutions is to do what politicians always do: pass the buck.  For example, I could foresee that in the next 11 years, some countries or US states could experiment with the Swiss model of government, in which public services, financial accountability and taxation are pushed as much as possible to the local level.

This would mean that federal/national taxes could be significantly reduced.  In Switzerland, for example, the maximum Federal income tax rate is 13%, and for most middle-income taxpayers, it is more likely 7-11%.  Huge centralized bureaucracies could be dismantled and reassembled on smaller scales in lots of smaller jurisdictions (states, provinces, counties, even individual municipalities).  It would then be their responsibility to set tax rates that will cover the costs of providing their services.

This would set in train a healthy tax rate competition between jurisdictions within the same country.  In Switzerland, for example, there can be a significant difference in your total tax bill if you live in one town compared to another town just down the road.  Just as you’d expect, the low-tax municipality is considered more attractive, especially by people with higher incomes – i.e. exactly the kind of taxpayers the municipalities want to attract in the first place.  When wealthier people want to live in a certain place, they bid up property values.  The result is a virtuous circle: lower tax rates, higher-income residents, higher tax revenues actually collected.  More prosperous town!


Nanny - or bully?

However, another trend we will see in the next 11 years will be a countervailing move in the direction of “big government”.  Namely, the state will increasingly intrude into our lives.  But that’s OK, because it’s all for our own good!

At least that is what we will be told.  Eleven years from now, the government will recommend, monitor, or out-and-out control a number of things that most people today consider individual liberties that are nobody’s business but their own:

Our “vices” such as drinking and smoking – including second-hand smoke – are already thoroughly regulated, of course.  But hang on tight, because many other “sins” await the heavy hand of government busybodies.  Consumption of trans fats and salt is starting to be regulated now, and soon we’ll see the same government urge to save us from food coloring, high fructose corn syrup (HFCS), soft drinks, and McDonalds’ Happy Meals.  (You know, stuff that can kill you!)

 

Not any more

 

One day, no doubt, the list of controlled (or banned) substances will extend to sugar, red meat, crème fraîche, Red Bull, hot chocolate… who knows? Maybe even tap water.  One idea posited in The New York Times (where else?) was for "bad" foods such as French fries and soft drinks to be taxed, in order to subsidize "good" foods like vegetables. Government experts would decide what foods are good and bad, of course, so don't worry, they're sure to get it right. As this article explains, people don't necessarily fail to eat their veggies because they're priced too high - i.e. it's just a question of consumer preference. People won't decide to buy politically correct foods just because they've been made a little cheaper.  The Times proposal is tantamount to "forcing people to pay more for food they want, as long as they can pay less for food they don't want." The big government mindset at its finest!

As William Saletan wrote in Slate, “Today's morality cops are less interested in your bedroom than your refrigerator.”  Legislators may use taxation to try and bring about social engineering as well, such as the recently floated idea to make parents pay a tax penalty if their kids are obese.

Years ago, conservative pundit William F. Buckley summed up this mentality by defining a nanny state liberal as someone who would have no qualms reaching into your shower and turning down your water temperature.  In this one imaginary vignette, Buckley managed to squeeze in several “big government” touch-points: invading your privacy and overriding your freedom to choose to take a hot shower, all in the interest of some greater good such as conserving energy – or maybe just to make sure you don’t burn yourself!  (Remember: it’s all for your own good.)

Buckley’s example was amusing.  But in 2007, it was announced on various web sites that Belgian authorities had determined that backyard barbecues emit greenhouse gases, so in order to discourage people from contributing to global warming when they have a Saturday afternoon cookout, Belgium would be introducing a barbecue tax of 20 Euros each time a citizen fired up the grill.  And to monitor compliance, police would fly over neighborhoods in helicopters outfitted with thermal detectors, and register the addresses where undeclared BBQ’s were going on!  Oh, the humanity!

It turned out this announcement was an April Fool’s joke.  I’m gullible; I fell for it.  But only because it seemed so plausible.  Silly and outrageous, maybe, but definitely plausible.  (Like any good scenario!)


Big Brother is watching you

Freedom of expression will be considerably less free than it is today.  This is simply because most societies value this freedom less than they value political correctness.  Or more accurately, politicians value freedom of speech less than they value their own self-image as liberal, tolerant, civilized people who find offensive language and thought repugnant – and therefore believe it should be punishable by law.

“Hate speech” – which basically means offending someone who belongs to a group deemed to need protection from being offended – is already punishable, even though it boils down to merely expressing a nasty opinion.  Colleges and universities are especially restrictive when it comes to hate speech, with “speech codes” that aim to enforce politically correct expression on campus.  In the next 11 years, this may get out of hand as more and more groups insist on protection from hurt feelings and succeed in extending the concept of “hate speech” to include “hate gestures”, “hate giggles” and even “hate sidelong glances.”

We will also be sacrificing a lot of privacy in the next 11 years.  For example, surveillance cameras are already a regular feature of life in the UK, and are coming soon to a city near you.  And soon we’ll be spied on from outer space, where Big Brother will figure out you’ve been driving too fast, and send you a speeding ticket by mail.

With the Internet and e-mail, whole new possibilities have come into existence for encroaching upon our personal privacy.   Using the Internet, for example, you leave a trail behind you – sites you visited, purchases you made, and so on.  From this information, it’s possible to develop a profile of you as a consumer.

Of course, on sites like Facebook, users willingly hand over private details about their lives.  Could this come back to haunt you? Yes.

E-mails you have sent – usually, your employer is legally allowed to monitor them.  But what happens to them after they are zapped through the ether?  They’re stored on the server of your ISP for one thing, so don’t expect that they could never be hacked into and read, altered and resent (or just chuckled over, which for some of us is maybe the worst risk of all).

Google street view shows your house to the world, and occasionally captures other tidbits about you as well.  And going through airport security now means having a “nude” photo taken of you, which supposedly is deleted so cannot ever be captured and sent to various gawking guffawing pals of the TSA employees who grabbed the pic in the first place. Yeah, right.


 

I have to lead for tomorrow’s world.

- Jeff Immelt, CEO of GE

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