The Symbiotic relationship between Crony Capitalism and the Welfare State

The welfare state has been built on the popular delusion that the major beneficiaries have been the underprivileged or the poor. 

In reality, such welfare programs favor the crony elitist class.

Austrian economist Gary North explains: (bold original)

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 defense spending. Who wins? A handful of large defense firms. This is fat city for the rich. It always has been.

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.

More on the the Middle class as carrying the cross of the poor….(bold mine)

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.

Add to this Bernanke’s and or the central bank dogma of promoting quasi permanent booms (bubble cycles) or asset inflation

 

The welfare state as protectionist shield in favor of cronies. (bold mine)

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.

Oh by the way, who has been benefiting from America’s existing healthcare programs?

Again it is the rich, from Zero Hedge: (bold original)

According to the latest data compiled by the Agency for Healthcare Research and Quality, in 2010, just 1% of the population accounted for a whopping 21.4% of total health care expenditures with an annual mean expenditure of $87,570. Just below them, 5% of the population accounted for nearly 50% of all healthcare spending. Just as stunning is the "other" side: the lower 50 percent of the population ranked by their expenditures accounted for only 2.8% of the total for 2009 and 2010 respectively. Perhaps in addition to bashing the "1%" of wealth holders, a relatively straightforward and justified exercise in the current political climate, it is time for public attention to also turn to the chronic 1% (and 5%)-ers who are the primary issue when it comes to the debt-funding needed to preserve the US welfare state.

The spending distribution in chart format

see more charts here

Liberal media and their experts have served no more than mouthpieces for cronies. 

And another thing, this hasn't just been exclusively a US dynamic.

Tweet of the Day: Jim Rickards on US Government Shutdown

This is from American lawyer, economist and author of the Currency Wars, James ‘Jim’ G. Rickards at his twitter (hat tip Peter Coyne of the Daily Reckoning)

Quote of the Day: Watch Asset Classes that are the Most Vulnerable to Wealth Taxes

When a government goes bust in a democracy (and most Western governments cannot possibly meet their unfunded liabilities) the majority of people who have no assets or just a few assets will always find it appealing to collect money from the evil “fat cats” (in the case of the US, the 1% who own 42.7% of financial wealth). It should be obvious that if 80% of the population owns just 7% of financial wealth, they will be tempted to transfer at some point in future, part of the wealth of the 5% or 10% richest Americans to the masses that have no savings.

The problems we face today are there because the people who work hard for a living are now vastly outnumbered by those who vote for a living.

Normally, we analyze various asset markets and individual investment opportunities according to their merits. But now, we also need to think which asset classes are the least and which ones are the most vulnerable to wealth taxes.

(bold mine)

This perspicacious insight is from Dr. March Faber from his latest market commentary. The point is one should think "out of the box". This isn’t your daddy’s markets. Other experts such as PIMCO’s Bill Gross has also echoed on this. 

In the recognition that financial markets are being explicitly and implicitly manipulated, looking at the effects of interventions would be the best approach rather than to just mimic or parrot what the mainstream says or thinks. 

The above also is a great description of today's mob rule politics.

Chart of the Day: Crowding Out Effect from the Welfare State

From Bloomberg Brief (source Zero Hedge) [bold original] 

Policy choices made in the near-term will affect the economy for years to come. If not addressed, current debt and spending dynamics will probably lead to a reduced growth path, placing at risk expenditures on vital social programs and, over time, crowding out private sector borrowing that funds the gross private domestic investment necessary to boost productivity and living standards. Dollars spent on entitlements dwarf those spent on discretionary items such as education, and tower over net fixed business investment, which is partially responsible for greater productivity, business expansion and rising living standards. Periods with greater investment as a share of GDP are highly correlated with both faster economic growth and rising living standards. One risk to the U.S. economy is that rising entitlement spending will require the government to borrow from the finite amount of capital held by private savers, thus squeezing out private firms that need the capital to expand businesses and increase productivity 

Inflationism (devaluation) will NOT solve the problem wrought by parasitical relationships. The greater the entitlements/welfare state, the lesser economic growth. Such untenable relationship ultimately leads to a crisis. Thus, the only recourse to such predicament is through a substantial reduction, if not the abolishment, of the welfare state accompanied by a liberalization of the economy.

Lew Rockwell on the REAL Evil 1%

Mises Institute Founder and Chairman Llewellyn H. Rockwell, Jr. eloquently writes,

In the end, we end up with about 3 million people who constitute what is commonly called the State. For short, we can just call these people the 1%.

The 1% do not generate any wealth of their own. Everything they have they get by taking from others under the cover of law. They live at our expense. Without us, the State as an institution would die….

The State is the institution that essentially redefines criminal wrongdoing to make itself exempt from the law that governs everyone else.

It is the same with every tax, every regulation, every mandate, and every single word of the federal code. It all represents coercion. Even in the area of money and banking, it is the State that created and sustains the Fed and the dollar because it forcibly limits competition in money and banking, preventing people from making gold or silver money, or innovating in other ways. And in some ways, this is the most dreadful intervention of all, because it allows the State to destroy our money on a whim.

The State is everybody’s enemy. Why don’t the protesters get this? Because they are victims of propaganda by the State, doled out in public school, that attempts to blame all human suffering on private parties and free enterprise. They do not comprehend that the real enemy is the institution that brainwashes them to think they way they do.

They are right that society is rife with conflicts, and that the contest is wildly lopsided. It is indeed the 99% vs. the 1%. They’re just wrong about the identity of the enemy.

Parasites thrive on hosts and at the latter's expense. That’s how the causal relationship works (even in biology).

How Multilateral Agencies Profit From Global Taxpayers

I have suggested that we should end or abolish the IMF, for many reasons such as the seeming perpetual advocacy of various forms of interventionism, incompetence, wealth transfer, moral hazard and political inequality.

This suggestion should also apply to the other multilateral agencies as well.

Pajama Media reveals how these institutions have used politics to foster wealth inequalities (bold emphasis added, italics original)

Many of Washington’s 2,600 technocrats working at the International Monetary Fund do not regard Dominique Strauss-Kahn’s lavish lifestyle as an anomaly.

Privately they admire it, recognizing it as a description of their own standard of living. They call their many unseen perks “golden handshakes.” At the World Bank, Inter-American Development Bank, the African Development Bank, and at the IMF, you find extravagantly paid men and women who masquerade as anti-poverty fighters for the Third World. As one World Bank vice president said upon his resignation: “Poverty reduction is the last thing on most World Bank bureaucrats’ minds.”

These global institutions are supposed to act as non-profits, but big salaries and big perks rule as the norm. And you’re paying for them: as the largest single contributor, American taxpayers pick up the tab.

By now everyone knows about DSK’s extravagant $420,000 employment agreement that included an additional $73,000 for living expenses — a provision explained thusly by the IMF: “To enable you to maintain … a scale of living appropriate to your position.” Most of the non-profit development world remained silent when the Fund announced a $250,000 “golden parachute” severance for the indicted managing director.

A PJM survey found that a common annual compensation package for senior management at the anti-poverty banks exceeds $500,000 — tax-free. World Bank President Robert Zoellick currently receives $441,980 in base salary and $284,500 in other benefits. Strauss-Kahn’s deputy, John Lipsky, receives $384,000 in base salary plus “living allowances.”

Some may argue as the IMF did that global financial leaders — even from governmental organizations – should be highly compensated. But the IMF and World Bank payments for their executives are three times the annual salary for U.S. Federal Reserve Chairman Ben Bernanke, and four times the salary of America’s Federal Reserve governors: Bernanke’s gross annual salary is set at $199,700; his governors receive $179,000.

The global banks’ stratospheric governmental salaries are not limited to chief executives. Ten of Zoellick’s deputies receive tax-free base pay of $321,00 to $347,000, plus enjoy an additional $210,000 in benefits. Even mid-level World Bank employees earn well into six digits: the average salary for a professional manager is $181,000, plus $97,000 in benefits. A senior adviser receives on average $238,000 plus $127,000 in benefits. A vice president receives $286,000 plus $153,000 in benefits.

The biggest hidden benefits are the off-the-book perks called “living allowances.” These perks can nearly double a stated salary. Of the 2,600 IMF and 10,000 World Bank full-time employees, all receive some form of supplemental living allowances in addition to their base pay. These include home leave grants, dependent allowances, travel perks, and education “grants” for their children to attend private schools. In addition, they offer generous pensions and health insurance policies.

Where do they get their lavish “golden handshakes”? From us, the productive sector, the taxpayers.

True, I am delighted that some of them have rediscovered the importance of economic freedom. But this isn’t anything new, as economic freedom has been long been advocated by classical liberals since the 19^th century.

In other words we don’t need to have highly paid bureaucrats to tell us something our ancestors knew, long ago.

Yet if economic freedom is to be nurtured, then the more these institutions are hardly needed because the services that they offer can sufficiently be provided for by the private sector.

Remember, the resources used to finance “golden handshakes” are resources that could have been used to generate productive rather than consumptive activities.

Worst, the above only shows of how the political divide from these institutions increases social inequality.

And as Cato’s Dan Mitchell aptly points out,

Redistribution from rich to poor is not a good idea, but it is far more offensive when the coercive power of government is used to transfer money from ordinary people to the elite.

This serves as another instance of politically based parasitism.