You cannot have both capitalism and the welfare state. The two are as unifiable as fire and water.
Yet today it seems as though the entire conservative and libertarian movement has decided to give that political oxymoron a serious try. From think tanks to Congress, the people and the organizations that proclaim to believe in, and fight for, limited government ignore, with unanimity, the grave and apparent consequences of our time's largest oxymoronic political compromise.
We are living in an era that, when history is eventually written, will be defined as one of slow decay of American capitalism. The egalitarian welfare state - a European concoction imported to the United States in the 1960s - has built a government debt that is now equal to GDP, with an almost unimaginable cost to future generations. Through both generous entitlement programs and high taxes, the welfare state then weighs down the private sector to a point where its ability to afford the welfare state is eroding already before the government debt has become a clear and present burden in itself.
The combination of gradual economic stagnation and increasingly expensive debt is the inevitable consequence of how politicians in the Western world have tried to combine the welfare state with free-market capitalism. Unlike socialism, which replaces capitalism, the egalitarian welfare state superimposes its socio-economic structure on top of it. Yet egalitarian economic incentives are contradictory to the incentives of a free-market economy. When they clash, relentless commitment from the political leadership of a country to advancing the welfare state will eventually force the free market to yield.
As egalitarian economic incentives, such as expressed in economic redistribution, gradually replace free-market incentives, their influence on the general culture of a country will erode commitment to free-market capitalism even in areas where the welfare state has not yet advanced. In the United States, for example, this is exhibited in the creeping government takeover of the health care industry, especially its consumer-delivery part. This mission creep by the egalitarian welfare state has produced invasive government regulations under the so-called Affordable Care Act.
In other words, as the egalitarian welfare state expands, it builds influence to a point that, for all intents and purposes, could be characterized as a "breaking point" for free-market capitalism. Beyond that breaking point, the capitalist system can still maintain itself, but is no longer capable of growing. The result is stagnant earnings, including stagnant wages, and an increasingly risky pursuit of profits in the corporate sector.
The growing risk-taking is especially visible in banking, but it also spills over into other industries. To protect themselves against excessive risk-taking, and to try to secure profits as far as possible in an increasingly stagnant economy, capitalists resort to non-market measures. The foremost of those measures is lobbying and other instruments to influence government policies. Since the cause of the stagnant economic environment is a large government, it is only natural for capitalists to try to gain control over government and thereby tilt policies in favor of their own businesses and industries.
Yet the more capitalists work to influence government - the result being what is commonly referred to as crony capitalism - the more they pile on to the destructive influence of government over the economy. Over time, profit margins continue to suffer and risk-taking escalates. This, of course, is felt among capitalists, whose response is to escalate lobby efforts.
An a consequence, the lines between corporate power and political power get blurred, thus rocking the constitutional foundations of the very country itself. Corporate power is not elected, but should be controlled through the free market. When capitalists lobby and otherwise influence legislation to secure long-term profitability and reduce risk-taking, their government relations gain them advantages that competitors do not have. As a result, the free-market component of the capitalist system is weakened.
When the free market weakens, so do the free-market incentives that define our economic culture. In other words, by lobbying government to gain advantages, America's capitalists reinforce a cultural metamorphosis that initially began with the welfare state. Over time, it becomes less obvious to the general public that free-market capitalism and its value system should be the prevailing socio-economic order in our country.
The fallout is a gradual erosion, and eventual demise, of any resistance to egalitarianism. Even deeply conservative circles grow to like the welfare state, a fact that is visible in two Trump-era legislative initiatives: his tax reform and his affinity for paid family leave.
Donald Trump is, overall, a good president who will leave America better than it was when he took his oath of office. That said, he clearly bears the marks of a political and corporate leader fostered in a capitalist system that is more crony than free-market. His tax reform exhibits this well: it reduced the tax burden on incorporated businesses - which will no doubt benefit with higher profits and larger payrolls - while maintaining high taxation on small businesses that do not qualify for the corporate income tax.
Larger corporations, which presumably are more avid lobbyists than small businesses, have secured a substantial gain in taxation advantage over their smaller competitors. Even if this was not the direct purpose behind the cut in the corporate income tax (a cut that in itself was much needed) it was a consequence that is not unwelcome in corporate leadership circles.
To President Trump and Republicans on Capitol Hill, there is nothing wrong in what they have accomplished. To America's future generations, there is. Capitalism cannot function over time without a truly free market.
Neither can the welfare state. Due to the aforementioned shift in economic culture and values, from the free market to egalitarianism, there is an ongoing attenuation of the public's understanding of the mechanisms that continue to provide funding for the welfare state. Yet it is precisely here that we can find the only workable antidote to the continuing decay of American capitalism. That antidote is the understanding that the welfare state is incompatible with capitalism. To put the American socio-economic heritage back on viable feet again, we must elevate the conversation over our country's future to the level where we explain the inherent contradiction between politically driven economic redistribution and free-market driven prosperity.
This is a conversation that cannot remain in the abstract, nor can it be confined to fine-wine dining occasions and the coherence circles in mutual-appreciation societies. It is a conversation that must take place in every think tank, every political campaign, every event and every movement that pledges allegiance to free-market capitalism in any form or matter.
Here, the free-market movement has failed. With a few bright-shining exceptions, think tanks with a conservative or libertarian leaning have resorted to increasingly eclectic efforts at scoring victories in small, clearly confined causes. Likewise, fewer and fewer elected officials with a declared conservative profile talk about the fundamental, structural issues that define our future.
The conservative debate over our nation's socio-economic organization is a dying breed. As a result of the waning interest in the systemic economic institutions of our nation, the proponents of an egalitarian welfare state continue to gain ground. Almost every president since Lyndon Johnson has made a major contribution to this advancement of the welfare state.
So far, there seems to be little interest among America's conservative and libertarian organizations and institutions in raising the bar for themselves. In shedding their spotlight on esoteric topics, a far cry from the bold fight to save free-market capitalism, they concede defeat and choose decay. Unless we change this debate; unless we dare elevate it to the systemic level and clearly explain that the welfare state and capitalism are incompatible; we will continue down the slope of stagnation and industrial poverty.
That would mean an economic death blow to America as we know her. No more, no less.
For my two latest books, please see:
Industrial Poverty: Yesterday Sweden, Today Europe, Tomorrow America (Gower Applied Research, 2014)
The Rise of Big Government: How Egalitarianism Conquered America (Routledge, 2018)