The High Cost of Liberalism

Taxes too high? You ain't seen nothing yet.

PETE DU PONT

Congress is in recess and many Americans are on vacation, but all that will end when Labor Day has passed and the House and Senate are back at work.

And that means the Europeanization of America will again be in full gear, from expanding government control and regulation of as many things as possible, to raising taxes, expanding the size of government, and reducing the choices individuals are allowed.

The Treasury reports that our country's federal debt has doubled in nine years, rising steadily, year by year, to $10.72 trillion from $5.67 trillion in 2000. Our deficit for the current year fiscal year, which ends Sept. 30, is expected to total $1.8 trillion, four times last year's figure, leaving us with a federal debt of $38,500 for every U.S. resident. Our economy is doing poorly; it will shrink about 2.6% this year. Unemployment in July reached 9.4% and will likely further increase, and tax revenues are down $353 billion over the first 10 months of this fiscal year.

So we can easily see what is just around the corner. Earlier this month Treasury Secretary Tim Geithner and Larry Summers, director of the National Economic Council, opened the door, suggesting that taxes on all taxpayers will have to go up. As Stephen Moore noted in The Wall Street Journal, "it would take almost $16,000 more from every household in America to balance the budget this year." We certainly won't get to balanced budgets for decades, but substantially higher taxation seems inevitable.

All of which leads to the essential economic question: Which tax increases do the current administration and Congress intend to enact? There are more than a dozen, all of which would negatively affect our economy.

One has already been signed into law by President Obama: an increase in the tax on tobacco, to $1.01 a pack of cigarettes from 39 cents, and to as much as 40 cents a cigar from a nickel--increases of 159% and 700%, respectively. This is expected to bring in $8 billion a year. Next up is a possible increase in alcohol, beer and wine taxes, raising about another $6 billion annually, and perhaps another $5 billion a year on sugary drinks will be enacted.

Then come a series of substantial tax increases that are on the Washington agenda that, if enacted, will create real problems for our country's economy.

First, allowing the expiration of the previous Bush administration tax cuts at the end of 2010. These reductions increased government tax receipts by $785 billion (just as the Kennedy and Reagan tax cuts increased tax revenues) and gave us eight million new jobs over a 52-month period. The cuts go away if Congress does nothing, raising tax rates on the top earners will to 39.6% from 35%, and on the next-highest bracket to 36% from 33%. The Joint Committee on Taxation estimates that 55% of these tax increases will come from small-business income.

Next comes Rep. Charles Rangel's additional tax increases, a part of the House health-care bill. The House Ways and Means chairman calls for a 1% surtax on couples with more than $350,000 in income, 1.5% on incomes more than $500,000, and 5.4% on incomes more than $1 million. The extra tax would kick in at lower levels for unmarried taxpayers. And if promised health-care cost savings don't materialize, the surtaxes would automatically double.

The House health-care bill contains several tax increases that would hit couples earning under $250,000 a year, contrary to President Obama's promises: $8.2 billion of tax increases for people using health savings accounts or other tax-free savings to purchase over-the-counter drugs; a "Comparative Effectiveness Research Tax" of $2 billion on all private and "public option" insurance, plus up to 8% paid by employers--mostly small businesses--that don't offer health insurance. There is even a proposed tax on individuals who do not have health insurance.

Then come some other tax increases the administration has favored:

• An increased tax on American companies doing business in other countries.

• Raising or abolishing the wage cap on Social Security taxes, which would effectively convert Social Security into a welfare program.

• Reducing the tax benefit for itemized deductions like charitable contributions, which would reduce philanthropy.

And then there's the Waxman-Markey "cap and trade" bill that has passed the House and will be taken up in the Senate this fall. It would give the government total control of the production, prices, availability and use of energy and add a global energy tax to imported goods--serious American protectionism. It would shrink America's economy by $400 billion each year and cause the loss of some 2.5 million jobs. For a household of four it would cost an average of about $3,000 a year. By 2035 the total family annual increased cost would be $4,600 for power, food, supplies, gasoline and transportation.

All told, the administration and Congress are pushing massive tax increases. Without a specific proposal we don't know how much taxes would go up if the Social Security ceiling is raised, but add the others up and we see up to $200 billion--and it could well be much more--in annual tax increases on businesses, individuals and the overall economy, which is already in recession.

The Wall Street Journal's Daniel Henninger observes that "to an independent voter or moderate Democrat, President Everyman is starting to look like a salesman for the superstate." These many proposed tax increases reinforce the point. They not only would be economically damaging, but chart a very scary course for our country.

Notes on Liberalism

Notes on Liberalism
Samuel Brittan

I start with a political value judgement, not with technical economics. A liberal is someone who attaches special value to personal freedom, just as a socialist or social democrat does to equality and a conservative does to authority. But I do not believe in arguing about definitions. If you want to say that a liberal is "really" something else, I shall not lose any sleep over it. Indeed to clarify matters I have taken to describing myself as a liberal individualist or just plain individualist. A liberal in my sense wants to reduce the number of man-made obstacles to the exercise of actual or potential choice. In other words he attaches a high value to what Isaiah Berlin called negative freedom.

He does not have to derive all public policy from one goal. He does believe, however in a presumption in favour of personal choice. In other words the onus is on those who want to proscribe drugs, alcohol, tobacco or foreign travel to make their case - not the other way round. There are many people who like to argue that poverty is a restriction on freedom. Again I want to avoid arguing about definitions. The substantive point is that if I cannot afford to fly to Greece, it is one sort of evil; and if my Government forbids me to travel there irrespective of whether I can afford to or not, it is another sort of evil. That is an act of coercion. Indeed one way of distinguishing between a liberal and a social democrat is that the liberal accepts the force of this distinction.

For a true market liberal any benefits in the shape of prosperity or economic growth are a bonus; and in any case the maximisation of GDP is an absurd objective of economic policy. It is better to say that although man cannot live on bread alone, he cannot live without bread.

And it would be futile to preach the benefits of personal freedom unless it were normally associated with reasonable material performance and this is especially true for emerging economies.

Obviously I cannot make the case for this sort of individualist liberalism in the time available. (I have done my best in A Restatement of Economic Liberalism, Macmillan 1988). But may I just say that it is nothing to do with the philosophical argument between determinism and free will, where if anything I am on the determinist side. Suppose that some super scientist with enough knowledge of causal laws and initial conditions could predict whether I will want to fly to Greece. This in no way establishes a case for the state interfering with my decision. Would it be better if my desire to visit that country were a random matter like the spin of a dice?

The best way of seeing where the market fits in is to look at the alternative of state socialism. How is the state to decide what products should be made, what jobs people should do, how long they should work and how much they should put aside in saving? I first became interested in these matters when I came across Milton Friedman when he was on a sabbatical at Cambridge, He would frequently reply to proposals for state intervention by saying "Perfectly all right if you think that the government should decide rather than the individual citizen." I was shocked by how many people were willing to accept this assumption in their defence of government intervention. Perhaps foolhardily, I tried to defend the mixed economy of Butler, Gaitskell and Macmillan without overriding individual choice.

There is also a strong connection between free markets and political and intellectual freedom. Very briefly, such freedom is difficult if the state owns or controls all the means of publication and dissemination and the job opportunities in journalism and the arts. Of course there are numerous examples of competitive capitalist economies which are unpleasant dictatorships. The point is that existence of a substantial market sector is a necessary but not sufficient condition for the existence of freedom in a wider sense.

There are two standard replies by socialists who have understood this critique. One is to say that the state should emulate capitalist practice, invest for profit and establish competitive consumer markets. In other words you make a donkey into a zebra by painting stripes on its back. Many of you will know far better than I do why this never works. The other reply is to espouse a market based on competitive workers' co-operatives. The liberal economist can have no principled objection so long as the shift to such co-operatives is a matter of free choice and not government enforced. In practice such co-operatives are likely to be interesting exceptions in a largely capitalist environment.

There are two main forms of failure which can distort markets, whether or not of the capitalist variety, as avenues for individual choice and which would be important even in a barter economy without money. They are externalities and public goods. The first can often be tackled by market methods, although not by laissez faire. The second is far more difficult to tackle in this way, even though there are some US libertarians who favour private armies and police forces, exclusive reliance on toll-financed roads and so on!

The facts of market failure have to be balanced against those of government failure. but are just as concerned with their own interests as businessmen and private sector workers. Even on the best of assumptions political decisions inevitably involve overriding minority tastes and views. This is well-trodden ground among students of political economy although to many political theorists it is alien territory.

To many people everything said so far will count as classroom games compared with booms and busts culminating in near breakdown of world monetary system. It is absurd both to ignore these developments and to abandon everything you have ever believed. Capitalism has always suffered from boom and bust. There is no regular cycle but a succession of fluctuations of varying degrees of severity. There is nothing so absurd as to see some commentators rushing from crying "Marx was right" whenever there is a severe slump and then back-pedalling to say that "capitalism is the only game in town" when economic recovery comes as it normally does.

The first step towards a level-headed approach is to cauterise the financial system. Its failings do not establish the dirigiste case. Nothing that has happened in the present credit crunch suggests that governments are any good at picking winners, that consumer choice should be overridden or that freeing international trade is a bad thing. What has gone wrong is the financial system that enables people to trade without the enormous inefficiencies of relying on barter. As Keynes said long ago: money will not manage itself, a message that also applies to credit.

Although it is helpful for the time being, a rigid division between the monetary system and the real economy is not ultimately satisfactory. The Dutch tulip bubble of the 18th century was not a product of monetary excess. No one should be surprised if examples of large scale imprudence, with or without criminality, emerge outside the financial sector before the present crunch is over.

What is ultimately at stake is the profit-seeking paradigm. Nearly all market-inclined political economists accept that profits must be sought not merely by legal means but within the unwritten rules of society. The problem, as Norman Barry has pointed out, is that there is great confusion and disagreement about what these rules are. Hayek almost alone among free market economists emphasised the importance of traditional rules which embody more knowledge than any one person can hope to have.

But he did not really go into any detail on say what these rules were. I might surprise some people by going back to the English novelist Jane Austen who took for granted the rights of private property, but also stressed its obligations and had the greatest contempt for those who pursue wealth for its own sake or to emulate others.

Obviously I have not been able to lay down new rules for the profit seeking game- merely to stress the need for them and provide a few hints.

Liberalism

Liberalism

Anatomy of an idea

Barack Obama shuns the L-word. But his speeches brim with liberal ideas and ideals. What is it about the doctrine that dare not speak its name?

AUTHORS who defend liberalism must often struggle just to get the word out without facing incomprehension or abuse—even today. To the left, particularly in Europe, liberalism means the free-market dogma of clever simpletons who created the present financial mess. The American right’s complaint is quite different. Forget that Hamilton, Jefferson and Madison fathered liberalism in the United States. For nigh on 30 years conservative Republicans persuaded American voters that liberals were godless, amoral, tax-happy hypocrites.

Intellectually, little of either charge makes sense. Twinned with “democracy”, as in what the West stood up for during the cold war, “liberal” was a term of pride. Since communism failed, the case for liberal democracy has only strengthened. Think of outstanding alternatives: illiberal Russia, undemocratic China, populist Venezuela, theocratic Iran.

Odder still, put this question to people who live, or would like to live, in a liberal democracy: “Which of the following values do you espouse—personal freedom, rule of law, active but accountable government, free but responsible markets, mutual toleration and equal concern for all?” It is a fair bet that people will tick most or all items on this list. Ask them if they are liberals, on the other hand, and many will turn contemptuously away.

That 20th-century connoisseur of doublespeak, George Orwell, would not have been surprised. Political language, it seems, has taken leave of political facts. Alan Wolfe, a professor of politics at Boston College, thinks it time to reunite them. His welcome and readable essay lays out what he thinks liberalism really amounts to and why it demands support.

Liberal politics, on his account, is rooted in a view of what matters in a human life. A gifted guide, he opens with a brisk Grand Tour of the liberal tradition. Glimpses of leading thinkers and the human values they argued for include Immanuel Kant (moral and intellectual autonomy), Benjamin Constant (protection from arbitrary power) and John Stuart Mill (promotion of human individuality).

The link with politics is that those three values all involve freedom. Whatever else it is, liberalism is about nourishing human liberty. Where liberals disagree is how that fits with a second powerful ideal, equality.

Right-wing liberals contrast “classical”, small-government liberalism and the modern, active-government kind. The one, so they claim, leaves people free while the other wrongly infringes freedom on behalf of equality. That story became popular in the 1970s, both as a history of liberalism and as a view of government’s limits.

Mr Wolfe, like other left-wing liberals, finds the contrast historically inept and conceptually confused. Making enemies of freedom and equality ignores, in his view, the democratic presumption that any one person’s liberty matters as much as the next person’s. It is deaf also to the fact that modern citizens’ freedoms are often limited by big social forces beyond their control. If all citizens are to be free in any effective sense, they require help from countervailing forces. Government is one such force.

If, the argument goes on, you take concern for everyone’s liberty seriously, you will treat the proper scale of government as a matter of circumstance, not principle. At times, government is overweening and ought to be cut back. At others, active government is required to steady markets, help the needy or serve the public good. Put abstractly, government may be called on to foster or restore equal liberty. Pragmatic, socially minded liberalism of that kind underpinned American and British government, from the New Deal until Ronald Reagan, from Clement Attlee to Margaret Thatcher. It seems, from necessity, to be with us again.

Mr Wolfe touches many topics. He defends liberals against the charge that they seek, illiberally, to keep religion and morals out of public life. In his most policy-minded section, he traces how liberal commitment to openness plays out with regard to free speech, immigration and transparent government. He notes the illiberal undertow of what he nicely calls “self-incapacitation books”, or popular-science writing in behavioural economics and evolutionary psychology claiming to show what little part reason and responsibility play in how we behave. He rebuffs the frequent charge that liberals are wobblers or dreamers. The true liberal temper, he tells us, is realistic, ironic and disabused.

Through no fault of Mr Wolfe’s, this fine defence of liberal values risks seeming to lag behind the news. He completed his book before Wall Street imploded, the American economy slumped and Barack Obama won the White House. Whether or not they buy the reasoning behind it, many readers will think Mr Wolfe’s call for active government is now merely pushing at an open door.

Faster than anyone expected, the argument among liberals has shifted. It is no more about active versus limited government, but about what active government should be doing. On that Mr Wolfe could have said more. No one with an open mind, however, can come away from “The Future of Liberalism” treating “liberal” as a term of abuse. Before long, who knows, even Mr Obama may drop his reserve and embrace the word with pride.