Bankruptcy of the Welfare State

April 18, 1949

The harsh realities of the new British budget were anticipated by the London Economist. As that weekly pointed out in its issue of March 19:

“The price of government in Great Britain today is 40 percent of the total of all incomes. . . . This is the hideous prospect that faces the British people. Even though every item of government expenditure is approved in detail... any such rate of taxation, if continued for long, will be disastrous to the national economy. . . . A state that taxes away 40 percent of all incomes, and much more of the incomes of the successful and the energetic, is killing the motive power that keeps it alive. . . .

“If taxation remains at 40 percent, it will be impossible for the community to generate enough savings to maintain its capital. . . . The long continuance of taxation of anything like 40 percent of the national income will ruin the country. It will not do so spectacularly in any one year or the next—there might be more hope if it would. . . .

“The lamentable thing is that it is very difficult, to the point of impossibility, to see how we can escape from the vise in which we are caught. . . . It is still official policy that the food subsidies—or most of them—are temporary, but it requires a sanguine temperament to believe that any government will ever dare actually to take them off. . . . There will have to be outright repeal of one or more major social schemes. Which is it to be? Education? The health service? Unemployment insurance? Old-age pensions? Housing subsidies? The whole face of British politics would have to suffer a complete change before any one of these became possible. It is a lamentable truth, but an inescapable one, that the British democracy would rather ruin itself than give up any one of its major spending projects. . . . Unless the price of government is reduced, the British economy will gradually strangle itself.”

All of which was confirmed by Sir Stafford Cripps in his budget speech. “How then are we going to get along with all this load of expense on our backs? By producing more.” But he neglected to point out that the tax load itself erodes the incentives and capital that increase production.

The amount of our own national income being taken by our Federal and local governments is about 25 percent. Some may think this moderate compared with the more clearly ruinous British 40 percent; but it is in fact dangerously excessive. The British, at least, still have part of their capital deficiency made up for them by our ERP. There will be no one to do that for us.

Yet not a day passes without a new government spending scheme being put forward in Washington, or in the states and cities. President Truman will soon propose a new multi-billion-dollar national health program. We are being asked to throw still more billions into Europe for armament. Our Secretary of Agriculture wants a new and more extensive type of multibillion-dollar farm subsidy. The public housing advocates are vociferous. The education lobby demands $10,000,000,000 in the next ten years for new school buildings.

All of these people talk as if the funds they were demanding were created by the government out of thin air, or could be taken out of some mysterious but inexhaustible idle reserve somewhere. They haven’t yet learned arithmetic. They still refuse to recognize that every dollar appropriated for them or their schemes leaves just one less dollar to the family who has earned it to spend for its own food or housing or clothing, or save for education or travel.

Our government spending zealots have not yet learned that the American tax burden is already excessive. The additional funds they think can most easily be seized for taxes are precisely the most basic and most vital funds of all. They are the funds that would otherwise go into investment—into improving and increasing the tools and equipment in the hands of the workers, increasing their individual productivity, their real wages, and the national production on which all social progress depends.