I’d like to draw readers’ attention to a statistic I flagged up a few weeks ago that I don’t think I emphasised sufficiently. I was writing about America’s current tax burden, its deficit, and the stark choice that Americans — and also the rest of the people of the world — face:

America spends 24% 39% of its GDP as government spending. Other nations spend far more than America, but they also tax more. 52% of French GDP, 37% of Japanese GDP, 47% of British GDP, 18% of Thai GDP, 32% of Swiss GDP, 78% of Cuban GDP, 27% of Indian GDP and 17% of Singaporean GDP is government spending.

Most interesting by far is “communist” China. Only 20% of Chinese GDP is government spending. 

Nihao, Capitalists!

That’s right: “communist” China is now less statist — at least in economic terms — than “free” America.

Meanwhile at Davos, the West’s “economic leaders” pillory capitalism as worsening inequality.

From the BBC:

Growing inequality should now be the priority for leaders after the economic crisis, senior economic figures at the World Economic Forum have said.

They insisted that more needed to be done to tackle excessive pay, poverty and unemployment.

The discussion, hosted by BBC World in the Swiss ski resort of Davos, was held as figures showed almost half of young Spanish people are out of work.

Economist Nouriel Roubini warned inequality threatened social stability.

“We are in a very fragile world,” said the economist, dubbed Doctor Doom because of his predictions leading up to the 2008 financial crisis.

“The issue of distorted pay is not being addressed, banks that were deemed too big to fail now becoming even bigger,” he said.

I think there is a very strange psychological trend occurring here, and it’s actually one I recognise in my younger self. I was born in 1987, and grew up in the shadow of the 1990s, long after Deng Xiaoping, long after the “End of History”, long after the end of the “Red Menace” that was the Soviet Union. Long after the West really felt any need to differentiate itself as “capitalist” against a background of growing statism. Instead, the growing statism was in the West, even in spite of the legacy of Reagan and Thatcher — two leaders who both managed to spew a great deal of pro-freedom rhetoric, while at once greatly expanding the scope and shade of government.

This psychological trend can be summed up as the idea that the first recourse for social and economic problems is more government action. Too much inequality? Regulate against it. Too little innovation? Legislate for it. Too little demand? Stimulate it. Too much bad government? Elect a better one, who will do more of the things we “love”, and less of those we “hate”.

The idea, in the simplest terms, is that changes to society should come from the great overhanging monolith, and not from the little individuals on the ground. No, we are just fish swimming in an ocean of dialectical chaos. We are just flecks of paint on the great canvas of humanity. No, let us not agitate or gravitate. Instead, we must “co-ordinate” and “unite” under the aegis of government; the blind painter.

The climax of this bizarre psychological trend was the election of Barack H. Obama. After all the misdeeds of Bush and Cheney, he would be the one to restore government to its “proper” role: “helping the people”, “creating a better America”, “investing in tomorrow”, etc, etc, etc, blah, blah, blah.

This is a licence for more central planning and more government largesse. There are two problems here:

1. Regulatory Capture: As David Rothkopf has argued: “Geography, pedigree, networking and luck unite a superclass of 6000 individuals that possess unparalleled power over world affairs.” Obama’s top contributors are the same old people. Obama appointed more ex-Wall Street figures to his administration than anyone before him. Ultimately, the people chosen as central planners have a track record of enacting policies that enrich themselves more than everybody else. The people lining up at Davos calling for a new system, i.e. more government, are the same elite who have ruined the old one. As Jonathan Weill writes: “It’s becoming hard not to suspect that the annual gathering in Davos has become a conclave for global elites to promote crony capitalism and state-backed enterprise, ensuring that national coffers remain available to be tapped for private gain.”
2. Unintended, and Unexpected Consequences: Central planners are often pretty bad at the job. Bernanke and Yellen failed to predict the end of the housing bubble (that their predecessor Alan Greenspan helped create) with terrible consequences. Tim Geithner lashed that there was “no chance of a downgrade” right before S&P downgraded US Treasuries. Angela Merkel demands austerity from a frail and ailing Greek economy suffering from a severe contraction that is only worsened by austerity. The Iraq and Afghani wars created more terrorists than they killed, and added a multi-trillion dollar shackle of debt to the American government. America’s deindustrialisation (in the name of cheaper Chinese goods) has created huge unemployment in America, as well as making the American economy ever more dependent on the fragile flow of trade for components and energy. History is dominated by black swans — and the history of  central planning is dominated by unintended consequences. We just don’t understand reality well enough to centrally plan it.

Of course there is a bigger concern here, and one that I have written about before: central planning kills the market mechanism. It kills market evolution and creative destruction, and gives life to absurdities — like the current global financial sector — that could never live under pure market conditions:

Capitalism means both successes and failures. It is a fundamentally experimental system, with a continuous feedback mechanism — the market, and ultimately profit and loss. Ideas that work are rewarded with financial success, and ideas that don’t are punished with failure. With capitalism, systems, ideas and firms that fail to produce what the market wants fail. They go bankrupt. Their assets, and their debt is liquidated.

When that mechanism is suspended by a government or central bank that thinks it knows best — and that a system that is too interconnected to fail is worth saving at any cost — the result is almost always stagnation. This is for a number of reasons — most obviously that bailouts sustain crippling debt levels, and are paid for through contractionary austerity, which is what Salmon was getting at. But it is larger than just that.

In nature, ideas and schemes that work are rewarded — and ideas and schemes that don’t work are punished. Our ancestors who correctly judged the climate, soil and rainfall and planted crops that flourished were rewarded with a bumper harvest. Those who planted the wrong crops did not get a bailout — they got a lean harvest, and were forced to either learn from their mistakes, or perish.

These bailouts have tried to turn nature on its head — bailed out bankers and institutions have not been forced by failure to learn from their mistakes, because governments and regulators protected them from failure.

The darkest side to this zombification is that it takes resources from the productive, the young, the creative, and the needy and channels them to the zombies. Vast sums spent on rescue packages to keep the zombie system alive might have been available to increase the intellectual capabilities of the youth, or to support basic research and development, or to build better physical infrastructure, or to create new and innovative companies and products.

Zombification kills competition, too: when companies fail, it leaves a gap in the market that has to be filled, either by an expanding competitor, or by a new business. With failures now being kept on life-support, gaps in the market are fewer.

Japan has experienced twenty hellish years of zombification, all because they suspended capitalism in favour of systemic stability and creditors getting their pound of flesh. America did virtually the same thing, and the result has been three years of stagnation.

That, is more or less why I believe government should stay out of central planning altogether, and instead should stick to the role intended for it by U.S. Constitution — protecting life, and liberty, administering the due process of law, and undertaking great projects like the Apollo missions beyond the reach of private enterprise. Will the central planning addicts at Davos get the message? I doubt it. After all, their entire worldview is predicated on the notion that they “know better”.

The irony is that — at least in terms of economic affairs — the Chinese “communists” seem to have gotten it.  After the awful experience of huge famines, they finally accepted that they did not “know better”. Perhaps it would take a cataclysm of similar magnitude for the West for us to realise that we do not “know better” than nature either…

UPDATE: It seems like I was wrong about US government spending. It’s actually 39% of GDP, not 24% as I first reported. That’s higher than the 34% of Vladimir Putin’s Russia.