The Economy


One of my favorite sayings is, “Today’s welfare state is tomorrow’s police state.” It comes from an observation of nations throughout history. People often ask me why the transition is nearly inevitable, and how it works. The answer is that democratic republics almost invariably go through a progression, with the terminal stage being tyranny and obliteration of most freedoms. To understand how it works, one has to understand the nature and succession of the stages. Without ado, here they are:

LIBERATION PHASE– The population gains freedom from despotism. Jubilation results as long-lost civil and economic freedoms are restored. Everyone has vivid memories of their miserable days under tyranny, and are protective of the liberties they recently won back. Unfettered, people hunker down and start to work to gain all the goods and services they lacked under the former state-controlled economy.

PROSPERITY PHASE– The economic well-being of the population rapidly increases.  Crafty entrepreneurs realize there is money to be made to satisfying the unmet needs of consumers. Meaningful, value-adding employment surges, while value-subtracting government employment drops like a rock. Efficiency gains are rewarded by higher profits, so overall productivity increases in the economy. Living standards rise as a result.

GUILT PHASE– People are inherently different in abilities and potential. Some individuals are smarter than others. Some are industrious, while others are lazy. Some people are good money managers; others are spendthrifts who misuse debt. Because of such differences, some people acquire great wealth and the income that results from it.  Others are less well-off, even struggling to pay bills.

It doesn’t help when some of the wealthy choose to live an ostentatious lifestyle. The disparity between rich and poor is vividly dramatized by journalists, and the population increasingly feels guilty about financial inequality amongst its participants.

REPRESSION PHASE- It is erroneously thought that government policies must be the cause of economic inequality, since everyone “knows” that “all men are created equal.” Others may even opine that inequality of economic results is incompatible with democratic rule!  Taxation policies are concocted to counteract differential wealth and income disparities. These take a multitude of forms, but may include: graduating income tax rates, wealth taxes, inheritance taxes, differential capital gains rates, luxury excise taxes, and minimum wage mandates. But instead of equalizing economic outcomes, the following unintended results occur:

  1. The most productive citizens are discouraged from undertaking new ventures, impairing economic growth.
  2. The wealthiest spend assets not on productive ventures that would improve the economy, but on schemes efficient in minimizing the effects of the punitive government taxes.
  3. Small entrepreneurs might also begin to function in ways that are opaque to the revenue authorities- e.g., receiving payments under-the-table and unreported.

Every evasive maneuver is countered by increasingly repressive government measures, especially surveillance. Financial privacy is ended, with banks being turned into spying accomplices for the government.

Obliterating economic inequality eventually leads to government spending more to “help” those with lesser financial outcomes. Once the principle is accepted that government exists to give some citizens things at the expense of others, the door is opened to endless mischief. Naturally politicians promise more citizens more things in exchange for their votes. Such largesse is typically financed through borrowing, and the debt is often monetized by a national bank. Inflation of all manner of goods and services inevitably results. It can conveniently be blamed on the “greed of the businessmen”.

TYRANNY PHASE– This can come gradually, or all at once with the public’s consent.

Freedoms can be lost over a period of time, while trying to enforce equality through increasingly stringent and invasive government edicts – especially via punitive taxation.

However, abrupt and violent regime change can also come with passive public consent. The overthrow of Salvador Allende in Chile took this path. The economy may become so badly damaged that citizens welcome a strong man who will take charge and return the economy to a modicum of normality. As more and more government function is dedicated to wealth redistribution, the existing authority loses legitimacy in the eyes of much of the population.  All but the poorest citizens become ambivalent about a coup d’état, as long as they are optimistic about the changes that it would bring.

Often it is hyperinflation that pushes the population over the edge. Wealth destruction that comes with inflation is so debilitating that any remaining confidence in a government is lost.

The appreciation of liberty appears to be in inverse proportion to the time that has passed since living under tyranny. People tend not to appreciate a good thing until it is lost.

Dr. Kim Henry

January 6, 2021


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