Does democracy have a future?

Unfortunately, welfare spending is addictive. And addictive in two ways.

First, once government has committed to a particular level of benefit, it is exceedingly difficult to reduce that level. And second, the benefit itself changes behaviour: many people who might otherwise have tried harder to find employment choose to go on, or stay on, a benefit, something strongly encouraged by the very high effective marginal tax rate faced by those trying to get off a benefit. The Domestic Purposes Benefit, introduced in 1974, provided financial support for just 17,231 people in 1975. By 1985, that number had increased to 56,548, and by 1995, little more than 20 years after the benefit was introduced, the number was 104,027. Until around 2013 the number of sole parents on welfare was consistently above 100,000. The number dropped post GFC during the second half of National's term of government (2008-17) but the downward trend has since reversed. At the beginning of 2021, there were 99,000 sole parents receiving a benefit - 10 percent up on the previous year. Many have never been in a stable relationship and anecdotal evidence suggests that some women become pregnant, or continue with a pregnancy, confident that taxpayers will provide on-going support. Certainly, there can’t be much doubt that the existence of taxpayer-funded support has eroded a sense of personal responsibility, eroded the tradition of family support, and undermined the organisations which flourished to provide support before the advent of large-scale taxpayer support, such as friendly societies. I have heard plenty of people upset at being expected to pay some modest contribution to the cost of their child’s education, while seeing nothing odd about expecting other people to pay for that education. I have seen plenty of media sympathy expressed for women (and on rare occasions men) who have three, four and sometimes more children and who are on a waiting list for taxpayer-funded accommodation. There is just a very strong presumption that taxpayers should be willing to fund the support of a substantial number of children brought into the world by parents who have neither the financial capacity nor, in many cases, the emotional capacity to support them.

Not only has the state’s willingness to provide income, housing, education, and healthcare to an increasing fraction of the total population become hugely expensive, it has almost certainly contributed to the gradual demise of the traditional family structure. I may be the last person who should be preaching about the virtues of marriage, having separated from not one but two eminently attractive wives. The only thing I can say in self-defence is that my children were well into their teens before either marriage broke up; and neither wife ever had to depend on income support from the state. I was able to maintain contact with all my children after my separations. But there is no longer any serious doubt that children are better off in every way – emotionally, economically, educationally – when they are brought up in a stable environment, preferably with both their natural parents. Of course, in some cases that is not possible, but that is clearly the ideal, and the extensive provision of taxpayer welfare has clearly made it too easy to walk away from that norm. We do nobody any favours by pretending that children can prosper whatever the family structure within which they are brought up. In the US, it seems very likely that this year will see some of these issues come to a head. American democracy is already at considerable risk from the millions of Trump supporters who have been willing to buy into the lie that Trump won the 2020 presidential election, despite every court case taken to overturn the election being rejected by the courts (including the Supreme Court, despite the conservative majority on that court) and despite the unambiguous assertion of the Attorney General appointed by Trump that there was absolutely no basis for believing that Trump had won. But now the conflict between a government’s desire to bribe the electorate with spending and reluctance to get the electorate to pay for those bribes seems likely to precipitate a different kind of crisis. Until recently, both major parties have been willing to authorise government spending while reducing tax rates, borrowing any shortfall between spending and revenue. That has required Congress to periodically authorise an increase in the so-called debt ceiling, currently US$31.4 trillion. Now, a sufficiently vocal number of Republican members of the House of Representatives have made it clear that they will not vote to increase the debt ceiling unless the Democrat government of President Biden agrees to substantially cut government spending (no suggestion that any of the tax cuts implemented by the Trump Administration should be reversed). Earlier this month, the Treasury Secretary announced that the US government had reached the debt ceiling – in other words, the government had borrowed as much as was legally possible to meet the deficit between current government spending and government tax revenue. Unless Congress votes to raise the debt ceiling by mid-year, the US government will, she warned, be faced with defaulting on its debt. A US government default on its debt – for the first time in history – would, by common consent, be an economic and political shock which would shake the world economy because to date the debt obligations of the US government have been regarded as absolutely without risk.

Forcing the US to default on its government debt would be an act of extraordinary irresponsibility. But it is also true that for the US government to keep adding to its debt year after year, even when, as now, the US economy is growing strongly and unemployment is very low, is also grossly irresponsible. That the US has been able to continue running a government deficit of the present scale, and of growing government debt faster than the US economy itself grows, is only because savers in the US and around the world have been willing to believe that eventually the US will get its fiscal house in order. But as Professor Kotlikoff noted, on the basis of present policies the US government is on a clearly unsustainable track. The Democrats are very reluctant to cut government spending, and Republicans want to cut government spending and don’t want to countenance any increase in taxes. The prospect of reaching agreement on the kind of deficit-reducing measures which the US situation clearly demands seems about as likely as making a manned trip to Mars and getting back alive. It might happen, but it won’t happen any time soon. A somewhat similar situation prevails in several of the countries in Western Europe: reducing government spending, or increasing tax revenue, to the extent required to reduce the enormous gap between future spending commitments and future revenue projections appears to be quite beyond the ability of current political systems to achieve. Witness the protests which President Macron of France is facing because of his very modest proposal to increase the age of eligibility for the taxpayer-funded pension from 62 to 64. Already several of the countries in the Eurozone are seeing the rise of “non-mainstream” political parties of the right and the left, and the adjustment of government spending levels has scarcely begun. To quote Oliver Hartwich again, the adjustments required “are unlikely to be achieved in a democracy without risking civil war”. What can be done? I find it very hard to be optimistic. Niall Ferguson suggested, in the Reith Lecture I mentioned earlier, that having governments adopt Generally Accepted Accounting Principles and publish proper balance sheets would be a good start – that would at least enable the public to see the true situation. New Zealand already does that, and perhaps that is one reason why our government debt position is somewhat better than that in many other developed countries. Ferguson also suggests that “generational accounts” should also be prepared on a regular basis “to make absolutely clear the intergenerational implications of current policy.” New Zealand doesn’t do that, although the long-term projections, of the kind published by the Treasury at four-yearly intervals, go some way to addressing that issue in this country. The latest such projection shows that the ratio of government debt to GDP will reach almost 200% of GDP here by 2061 unless some changes in current policies are made, primarily as a result of the increasing fiscal cost of both New Zealand Superannuation and healthcare as the population ages. Ferguson says that unless the situation changes “western democracies are going to carry on in their current feckless fashion until, one after another, they follow Greece and other Mediterranean economies into the fiscal death spiral that begins with a loss of credibility, continues with a rise in borrowing costs, and ends as governments are forced to impose spending cuts and higher taxes at the worst possible moment.” And in my view, there has to be a serious risk that democracy will not survive that kind of shock. The great 19th century French historian Alexis de Tocqueville once remarked that “the American Republic will endure until the day Congress discovers it can bribe the public with the public’s money.” Even earlier, in the late 18th century, Alexander Tytler, a Scottish history professor at the University of Edinburgh, is alleged to have said, in commenting on the fall of the Athenian Republic some 2000 years earlier: A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. Others are more optimistic. David Roche and Bob McKee wrote a book entitled Democrisis: Democracy caused the debt crisis. Will it survive it? Though acutely aware of the serious debt issues facing all democracies, they are more optimistic, and conclude that “the flexibility and responsiveness of democracy are the key reasons why we believe it will continue to be the global winner – the preferred operating system of the global system – with other systems converging towards it. The unpredictable nature of future outcomes of the debt crisis makes democracy much more likely to be able to cope than any other political model.” I profoundly hope they are right, and recall Winston Churchill’s famous assertion that “democracy is the worst form of government except all the others that have been tried.” If I had a choice, which of course I don’t, I would go for some form of “guided democracy” but alas the world has only seen one Lee Kwan Yew in my lifetime.