The passing down of inherited capital is one of the most important and fruitful features of modern capitalism
The wrong point: Barack Obama delivered
a State of the Union address which made scarcely any mention of the
national deficit and what measures might be required to reduce it Photo: AP
Is there anybody in charge on either side of the Atlantic who has the remotest
understanding of what is happening with the economy? Or even a glimmering of
what would be required to bring about its recovery?
If there is, then it is the best kept secret in public life. Judging by the
pronouncements and policy decisions of a Left-of-centre administration in
Washington and a Right-of-centre government here, this total absence of
comprehension seems to be common to those of all political persuasions in
positions of power: it is the universal blind spot of the governing class.
The ability to perceive reality is apparently confined to those who are
either in official opposition (in the US), or belong to dissident factions
within the party which holds office (in Britain). For those of us who
believed that the Anglosphere was the last redoubt of economic literacy –
struggling to speak sense in a world drowning in European gibberish – this
has been a trying week.
Barack Obama delivered a State of the Union address which made scarcely any
mention of the national deficit and what measures might be required to
reduce it – which is to say, the need to cut government expenditure.
Instead, he announced even larger and more ambitious federal spending
programmes. He made it absolutely clear that the mission of his presidency
was to redistribute wealth rather than to address the urgent question of why
America is failing to create more of it. (His only nod in the direction of
the need to stimulate growth was to express a new-found enthusiasm for free
trade with Europe which, considering his previous position on this, was a
sign of desperation.)
His party’s view of the spending question is, indeed, ingeniously delusional.
The Democrat leader in the House of Representatives, Nancy Pelosi, has said,
“It is almost a false argument to say we have a spending problem.” (I love
that “almost”.) Her party whip, Steny Hoyer, asserted that the country does
not have a spending problem at all – it simply has a “paying-for problem”.
(Imagine your teenage child explaining that he needs an advance on his
allowance, not because he has spent too much money but because, for some
peculiar reason, he just can’t pay for everything he has bought.)
In spite of being the most ostentatiously cosmopolitan and internationally
confident president in a generation – in famous contrast to the parochial,
down-home figure of his immediate predecessor – Mr Obama seems unaware of,
or at least unwilling to acknowledge, the hard lessons of European social
democracy: that if you expend all your political efforts on redistributing
wealth, you inevitably end up penalising the creators of it. So, pretty
soon, you run out of new wealth and you are forced to ration and recycle the
shrinking pot of what is left. And the absence of wealth creation means that
it is not only the sum total of capital that diminishes, but the
innovativeness and optimism of the society at large. It is not just wealth
that fails to grow but creativity, ambition and personal fulfilment.
In Britain, and to a lesser extent in Europe, there is some serious thought
being given to escaping from this morass. It is now pretty much accepted,
except by outright lunatics like Herman Van Rompuy and François Hollande,
that this is the major political dilemma of our time. But for some bizarre
reason, the United States is determined to relive our history of the past 40
years. Maybe the unsinkable entrepreneurial spirit of a nation of immigrants
will survive even this. They say that America is an optimistic country
because that’s where the optimists went. Well, good luck with that.
In the meantime, however, we have to cope with our own state of denial at home. David Cameron and George Osborne, who would insist that they do – really, truly – understand the need to reduce the deficit, cut government spending and stimulate growth, have just overseen the most spectacular extension of the universal welfare system since the Attlee government. With their new social care programme, they have effectively created a parallel national care service to run alongside the National Health Service: a guarantee that government will cover the costs of elderly nursing care for everyone, with the only limitation that those with assets of over £200,000 will have to spend £75,000 of their own money before becoming eligible. After that, everybody (even millionaires) will be entitled to free care paid for out of general taxation. Given the ageing population, which is already overtaking predictions, the cost of this is going to be stratospheric. But instead of taking this impending crisis as an opportunity to think afresh about the whole question of universal, state-subsidised provision, the Government has fallen back on the post-war model – presumably out of sheer political cowardice.
We might have taken this moment to examine alternative solutions: inviting the insurance industry to suggest products that would provide reasonably priced cover for elderly care, or co-operatives involving personal contribution-based schemes such as the trade unions used to operate. Instead we have gone for a monolithic national plan in which the less well-off will help to pay through their taxes for the care of the rich. Like the state pension system, it will be a form of Ponzi scheme, in that a current working generation will always be funding an older one instead of investing for its own future care.
Ah, but this is all right, says the Chancellor (sounding uncannily like Mr Obama), because it will be paid for by taxing the “rich”. We are going to cover the cost of this National Care Service by freezing the threshold on inheritance tax at the present level of £325,000. Let’s ignore the disastrous politics of this move – how it reverses the 2007 decision that actually brought the Tories and Mr Osborne a brief delirious spell of popularity – and just consider the economics. Depriving the “rich” (those with assets worth roughly the price of an upmarket suburban semi) of the right to pass on the full value of their assets is presumably seen as damaging no one except their own over-privileged children. I return to my original question: does anybody around here have a grasp of economic reality?
The passing down of small parcels of inherited capital is one of the most important and fruitful features of modern capitalism. If every generation has to start from scratch in building capital, the possibility of investment diminishes drastically. People who inherit their parents’ homes or savings don’t stash the money under the mattress. They spend it, or they invest it – very often in their own businesses, which then expand. And those little parcels of wealth that aren’t sucked into the government’s deadening grasp go back into the economy to help fuel growth. Does Mr Osborne – or Mr Obama – really not understand that?
In the meantime, however, we have to cope with our own state of denial at home. David Cameron and George Osborne, who would insist that they do – really, truly – understand the need to reduce the deficit, cut government spending and stimulate growth, have just overseen the most spectacular extension of the universal welfare system since the Attlee government. With their new social care programme, they have effectively created a parallel national care service to run alongside the National Health Service: a guarantee that government will cover the costs of elderly nursing care for everyone, with the only limitation that those with assets of over £200,000 will have to spend £75,000 of their own money before becoming eligible. After that, everybody (even millionaires) will be entitled to free care paid for out of general taxation. Given the ageing population, which is already overtaking predictions, the cost of this is going to be stratospheric. But instead of taking this impending crisis as an opportunity to think afresh about the whole question of universal, state-subsidised provision, the Government has fallen back on the post-war model – presumably out of sheer political cowardice.
We might have taken this moment to examine alternative solutions: inviting the insurance industry to suggest products that would provide reasonably priced cover for elderly care, or co-operatives involving personal contribution-based schemes such as the trade unions used to operate. Instead we have gone for a monolithic national plan in which the less well-off will help to pay through their taxes for the care of the rich. Like the state pension system, it will be a form of Ponzi scheme, in that a current working generation will always be funding an older one instead of investing for its own future care.
Ah, but this is all right, says the Chancellor (sounding uncannily like Mr Obama), because it will be paid for by taxing the “rich”. We are going to cover the cost of this National Care Service by freezing the threshold on inheritance tax at the present level of £325,000. Let’s ignore the disastrous politics of this move – how it reverses the 2007 decision that actually brought the Tories and Mr Osborne a brief delirious spell of popularity – and just consider the economics. Depriving the “rich” (those with assets worth roughly the price of an upmarket suburban semi) of the right to pass on the full value of their assets is presumably seen as damaging no one except their own over-privileged children. I return to my original question: does anybody around here have a grasp of economic reality?
The passing down of small parcels of inherited capital is one of the most important and fruitful features of modern capitalism. If every generation has to start from scratch in building capital, the possibility of investment diminishes drastically. People who inherit their parents’ homes or savings don’t stash the money under the mattress. They spend it, or they invest it – very often in their own businesses, which then expand. And those little parcels of wealth that aren’t sucked into the government’s deadening grasp go back into the economy to help fuel growth. Does Mr Osborne – or Mr Obama – really not understand that?
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