The Welfare State is a Slave Master

Recently I read a very peculiar news report. It said that the Spanish government has appointed what the media are calling a “Sex Tsar”. It is officially a “commissioner for the demographic challenge”, whose job is to persuade the people of Spain to have more sex, and by extension, more children. The Spanish are not alone. In 2016, the Italian government ran a “Fertility Day” campaign to get people to have more babies. The Swedish government has initiated a study into the sex lives of its citizens, to find ways to increase the amount of sex Swedes have.

If that was all there is to the story, we could chalk it up to politicians being their usual ridiculous selves and have a good laugh about it. But this nonsense has serious economic causes and potentially far reaching consequences.

The Welfare State

In each of the three cases, the main reason governments wanted more children was to save the welfare state. The welfare state is the biggest Ponzi scheme on Earth, as the great economist Milton Friedman explained.

As long as there are more tax payers (young, working people) than those who are receiving benefits of the welfare state, the whole operation runs fine.

The problem starts when people have fewer babies, as in Europe. This will result in a larger number of old people depending upon the government, which will have to tax a smaller and smaller working population to finance the benefits. Without new fools to con, the Ponzi scheme will collapse. Even Paul Krugman understands this elementary fact about welfare schemes like Social Security.

Immigrants could compensate for the shrinking population in Europe and increase the tax base for governments. But the governments have closed borders to refugees from Syria and other countries (due to political compulsions), making immigration more difficult precisely when they need more people. If they cannot get more taxpayers through migration, the only alternative is to get their citizens to have more children.

A Little History Lesson

In 1807, the United States Congress outlawed the import of slaves, akin to the immigration controls in modern Europe. Because slave masters could not get in more slaves from Africa, they established “breeding farms”, as Ned and Constance Sublette describe in their book titled “The American Slave Coast”.

On these breeding farms there were far more women and children than men. Slaves were encouraged to have stable family lives. As economic historian and Nobel laureate Robert Fogel explained in his book “Time on the Cross”, most slaves were sold with their entire families, or only when a slave wished to separate from his family, separately. In fact, as distinguished economists Thomas Sowell and Walter Williams have pointed out so often, more black children were raised in two parent families during slavery, than are today.

Was this because slave owners had any love for their slaves? Not by any stretch of the imagination. The slave owners simply wanted to maximise profits by encouraging their slaves to have more children. They gave rewards to women for having children, similar to the tax benefits or payments offered by a welfare state. Just as politicians can stay in the welfare business only if citizens have more and more children, the slave owners could stay in business only if slaves had more and more children. They knew that, and acted purely in their selfish interests, just like politicians.

Next, Fogel pointed out that living standards for slaves in the South were comparable to those of free workers in industry. The master ensured the welfare of his slaves, just like the modern welfare state.

There is yet another striking parallel between the welfare state and slavery. People such as George Washington and Thomas Jefferson believed that slavery was a terrible thing-Jefferson called it a “great political and moral evil”-yet they continued to hold slaves. They justified it by saying that slaves are not capable of taking care of themselves. In the event that they set the slaves free, they argued, the slaves would fall into destitution and suffering. In other words, slaves could not take care of themselves.

This argument made by Washington and Jefferson is exactly the same as that made by proponents of a welfare state. History is bound to repeat itself if people don’t pay attention the first time around.

People in countries that have a growing population, such as the US, or developing countries like India, should learn the lesson before it is too late, and take steps to roll back the welfare state while there is still time, or end up being slaves to the state.


New Delhi’s Monumental Ponzi Scheme

Sometimes, you just have to hand it to government officials. They can take their most terrible failures and present them as a success. Latest case in point, the budget deficit. Arun Jaitley calls it “fiscal prudence” to have a fiscal deficit of 3.2% of GDP, which will almost surely be revised upwards, since that is just an estimate.

But fiscal deficit does not tell the whole story. Reading the budget documents, one comes across a number called the primary deficit. That is the fiscal deficit minus the interest payments on loans that government has taken over the years. The primary deficit is just 0.1% of the GDP. Meaning that most of the fiscal deficit is there to pay back previous loans.

Just so it sinks in, I shall say it again. The government is taking new loans to pay back the interest on its old loans. In fact, 18% of the central government’s budget goes to these interest payments. Does that sound prudent? Because from where I am sitting, that is very, very irresponsible.

And I have not even spoken about the principal amount of the loans. The central government owes a debt of around 65% of the GDP. A debt which grows at an astounding rate of ₹1.32 lakh per second.

Borrowing to repay old loans is very similar to a Ponzi scheme. In fact, if any of us did that, we would be in jail right now, but when politicians do it, it magically becomes “fiscal prudence”.

“But why”, you might ask, “is this a problem?” Let us look at the some other countries that have gone down this path. Japan, which had gone down this path some time ago, lost two decades after that, during which the economy stagnated. Japan’s economy continues to be sluggish. Also, the Japanese pay more than 40% of their tax revenues for interest payments on old debt.

Or look at Greece which is stuck in an even worse debt crisis. The Greek debt to GDP ratio is 180%. The overall tax burden on the Greek economy, to service this enormous debt, is 34% of GDP (double of India’s 17%). This has led to massive unemployment (at 26.5%) and great political instability in Greece.

Why hasn’t it happened in India yet?

One thing any careful observer will notice about Greece and Japan is that they have relatively older populations. This is why their economic growth is considerably lower. India, on the other hand, has the world’s largest youth population, which will grow for the next few years. This demographic dividend is giving us higher economic growth and a larger tax base. This allows the government to service the debt, for now.

But, within a few decades, India will have the world’s largest aged population. As the tax base shrinks and more welfare benefits have to be paid out by the government, India will find itself in a similar debt crisis. In other words, the Ponzi scheme of New Delhi will collapse when there are fewer new subscribers.

The burden of that debt crisis, by the way, will fall on generations yet unborn. It would be morally reprehensible for us to saddle them with such huge levels of debt so that we can enjoy life today.

How do we curb debt accumulation?

The debt owed by the central government has been accumulated over almost 70 years. It will not be easy to get rid of it. It is not impossible, however. I shall explain the necessary steps to eliminate the debt and put India on the path of healthy growth.

First, eliminate the deficit. Having a budget surplus will allow repayments of the principal amounts and get rid of the debt in the next two or three decades. How do we create a surplus? One way would be to increase tax rates, but that is undesirable for economic growth, and will be politically damaging for any government. Therefore, the alternative that remains is to cut down government spending. In a developing country such as India, total government spending should not exceed 10% of the GDP, as recommended by the great economist Milton Friedman. When America was at this stage of development, the federal government did not spend more than 3% of its GDP. In India, however, the central government alone spends more than 10% of GDP. This slows down economic growth by taking resources away from a more efficient private sector.

However, tax revenues still need to rise. How do we increase tax revenue while keeping tax rates constant? The answer is to boost economic growth. What is the best way to increase economic growth? It turns out that when there are too many regulations and restrictions on economic activities, growth is slower. On the Index of Economic Freedom, India ranks an abysmal 123, behind countries such as Sri Lanka, Uganda and even Nigeria.

The sheer number of regulations in this country prevents the economy from achieving its full potential. The government needs to take serious measures to improve economic freedom in India. Doing so would unleash the productive energies of the world’s largest youth population, leading to higher incomes for people. This would translate into higher tax revenues without increasing tax rates.

Some of the measures I suggested will be difficult to implement, but, there are only two options. Either those measures are implemented, and India goes on to become a healthy economy similar to Hong Kong and Singapore, or they are not implemented and India goes the way of Japan and Greece.

Why Trump Gutting the EPA is Good

Since he took office, Trump has been trying to do some very nefarious things, such as increasing restrictions on trade and immigration into the US. But he is also doing some good things, such as going after the Environmental Protection Agency (EPA).

He has issued a gag order to prevent EPA agents from speaking to the press or posting stuff on social media. There are also expected to be $800 million in budget cuts and that is just the start. He has expressed a desire to abolish the EPA entirely.

How is that a good thing? Won’t the evil corporations pollute even more? These are valid concerns. But the evidence goes against this. The fact is that EPA regulations have done very little to protect the environment and have proven harmful in quite a few cases.

Counterproductive Regulations

When we wake up, the first thing we do is take a shower. But the EPA has added a unique twist to this. In order to save water, the EPA has mandated that all shower heads come with a device called a flow restrictor. What this does is makes the water come out more slowly. Surely that helps conserve water, right?

No! What it does is take all the fun out of the shower experience, while making sure that people stay in the shower for 25 minutes instead of the usual five minutes, and use more water. Even Trump understands this!

Also, this is on a per shower head basis. For regular people, the shower sucks. The rich, however, can have fancy bathrooms with spray coming from all directions and enjoy the shower, while using far more water than they would have without the regulation.


What about pollution? The fuel for cars has been made more expensive by another nonsensical mandate by the EPA. Fuel manufacturers have to blend cellulosic ethanol into their product, since it would be less polluting. There is just one slight problem. It doesn’t exist yet, at any commercial level. The EPA has mandated the use of close to 53 million litres, while the total production is only about 76000 litres.

So what does this regulation do? It makes fuel manufacturers pay a hefty fine, which is passed on to consumers, while doing NOTHING to protect the environment.

But these are just mild inconveniences to consumers”, you are probably thinking. “Surely all the good that the EPA does must outweigh the damage, right”? Wrong. Regulations by the EPA have been known to kill people. In order to control particulate matter entering the atmosphere, the wise and benevolent EPA requires all diesel engines to be fitted with a filter. This filter needs to “regenerate” (burn off the accumulated particulates), at regular intervals, meaning the vehicle shut down against the driver’s will. This resulted in the death of a gunshot victim who was being taken to the hospital, when the ambulance shut down.

The EPA later exempted emergency vehicles from this mandate, but vehicles that had already been sold prior to exemption have not been retrofitted. Fire departments and hospitals are dealing with this by keeping the vehicles out of service for extended periods to keep the filters clean, putting severe limitations on emergency services and risking countless lives.

So how do we protect the environment?

Regulation, as we have seen, does little to benefit the environment, while having a lot of unintended consequences. This happens because regulators can not collect all the relevant information and incorporate it into their policies. That information is dispersed among millions of individuals and cannot be aggregated in any meaningful sense.

Thus we must rely on markets to help the environment. There is a widespread consumer demand for environment friendly products, and manufacturers are responding to it.

For example, there are showers that use air induction, meaning that the same force can be obtained while using less water, keeping the shower experience still fun. It also saves on electricity (and money), since there is less water to heat, which means that less fossil fuels are burnt.

As for pollution, the market is again ahead of the EPA. Several manufacturers have or are planning to enter the electric car segment? Why? Because consumers want those. Not only is going green increasingly fashionable, it is also getting cheaper every year.

A study found that the cost of battery packs used in these vehicles has been declining by about 8% annually, and is expected to decline further with mass production. Government, for its part, has continuously subsidised oil companies, which makes petrol and diesel relatively cheaper and encourages pollution. Stopping these subsidies and letting market prices work would speed up adoption of electric cars.

Trump might deny climate change all he likes, but he cannot stop consumers from demanding environment friendly products. That is the power of the market. By curtailing the EPA and letting the market take over, as far as the environment is concerned, Trump is doing the world a service.

Even Karl Marx Hated Protectionism

Karl Marx was not particularly famous for his advocacy of economic freedom. Yet, even he understood the evils of protectionism. Marx, as quoted by his sidekick Frederick Engels, gave probably my favourite definition of protectionism.

The system of protection was an artificial means of manufacturing manufacturers, of expropriating independent labourers, of capitalising the national means of production and subsistence, and of forcibly abbreviating the transition from the medieval to the modern mode of production.

Wow. So much wisdom packed into one sentence, and that too, from Marx. Let us go through the sentence bit by bit to understand its meaning.

Artificially manufacturing manufacturers

This is an obvious one. We need only look at Donald Trump, and the way he seeks to create jobs in the United States. By imposing tariffs on imported goods, Trump wants to encourage their production in America by making it relatively cheaper. This is what Marx meant by “manufacturing manufacturers”.

Expropriating independent labourers

Protectionism, as Marx observed, hurts the working class. Apart from the corporations who are protected against foreign competition, and their employees, everybody loses. For example, when Obama increased tariffs on tire imports, it increased the incomes of workers in that industry by less than $48 million. But it forced everyone else to spend $1.1 billion more on tires.

Just imagine the impact of Trump imposing across the board tariffs on all products. The cost of living for the average working class American would shoot up by an order of magnitude. And that is not even considering the impact of retaliatory tariffs.

Capitalising means of production and abbreviating the transition to modern mode of production, said Marx, is another function of protection. When you make it expensive to employ people by way of minimum wage and other labour regulations, you make it relatively more profitable to use machines. Economist Narendra Jadhav tracks how manufacturing in India has become more capital intensive over the years. Tariffs on imported goods did not help create jobs in the manufacturing sector. Even though India has armies of young, unemployed people it is cheaper to use machines rather than comply with the nearly 250 different labour laws (central and state combined).

Just because Trump imposes a tariff on Chinese goods does not mean that jobs will “come back” to the US. Even if there were no minimum wage, wages in the US are naturally higher than wages in less developed countries, meaning it would still be cheaper to use robots.

The Benefits of Free Trade

Apart from more and better quality goods that would be available more cheaply, as Don Boudreaux points out ever so often, there is another thing to be gained from free trade. Marx said it would lead to the “emancipation of the proletarians”. I turn once again to India as an example. Where earlier the rigid caste system forced so called “untouchables” into demeaning jobs (such as cleaning sewers), in the past 25 years some of them have become millionaires as a result of India being opened up to trade.

It is a shame, that even when virtually all intellectuals, from Hayek and Milton Friedman to Karl Marx and Keynes, have agreed that free trade is the best, there are people who would adopt a protectionist approach.

Government Transportation is Literally a Train Wreck

In March of 2015, Germanwings Flight 9525 crashed into a mountain, killing all 150 people on board. On November 20 of this year, the Indore-Patna Express derailed after a suspected rail fracture, killing at least 149 people. Both events were tragic and probably preventable, but the responses to those tragedies could not be more different.

Germanwings Flight 9525

This was the first and only fatal accident in the 18 years of the airline’s operations. The co-pilot locked himself in the cockpit and deliberately flew the plane into the mountain because he was depressed and wanted to commit suicide. His doctor had deemed him “unfit to fly”, but he hid this information from the airline.

Lufthansa, which owns Germanwings, offered an initial sum of 50,000 Euros ($54,000) to the families of the victims to help cover immediate costs. For families of German victims, the amount was 95,000 Euros ($102,671). This was separate from the compensation, which amounted to $206 million in total, or $1,382,550 per family (I excluded the pilot’s family in my calculation). Many families are not satisfied with this compensation offer, and have filed lawsuits, so Lufthansa may actually end up paying substantially more.

In the aftermath of this incident, Lufthansa and other airlines introduced more stringent background checks. They put in place several safety measures, such as requiring two crew members in the cockpit at all times. They did their best to make sure that such a tragedy is never repeated.

This phenomenon is not unique to Germanwings and Lufthansa. Indonesia AirAsia Flight 8501 crashed in 2014 due to a malfunction, which the pilot was unable to handle. As with Germanwings, this was the only fatal accident in the airline’s history. The airline similarly offered an initial compensation of $25.115 lakh for immediate expenses, on top of the $104,010 it offered to each of the victim’s families. As with Lufthansa, they might end up paying more once all the lawsuits are settled.

Following the accident, the airline implemented improved training programmes for its pilots so they can respond more effectively in the future and avoid such a tragedy.

The Indore-Patna Express Derailing

Unfortunately, the derailing of one of India’s publicly owned railways was not the first time this had happened. Thousands die every year in rail accidents, and far more are seriously injured. In 2014 alone, more than 25,000 people were killed in rail accidents.

In response to the accident, politicians offered cliched statements of condolences to the bereaved families. Railway minister Suresh Prabhu promised that the guilty would receive the “strictest possible punishment. Prime Minister Narendra Modi announced a compensation of a measly $3,824 to the families of the deceased.

This has been the sequence of events for many years, regardless of who was in charge of the government at the time. Few, if any, proper measures have been taken to improve the safety of rail travel.

Accountability in the marketplace

Why is there such a vast difference in the safety standards of airlines and the railways? Why is it, that airlines take steps to make flying safer and offer more generous compensation to those affected, while railway officials are so callously indifferent to the safety of their passengers?

The airline companies and aircraft manufacturers have to pay millions of dollars in compensation to the victims families. When company profits take a hit, the CEO does not get a bonus that year. Those who were responsible for the accident lose their jobs. The shareholders receive smaller, even zero, dividends that year.

The airlines voluntarily offer compensation over and above the legal requirements. Why? To make sure that customers still want to fly with them. They improve pilot training and aircraft design for the same reason.

Markets are savage and unforgiving masters to those who disregard the consumer’s interests. They hold people accountable and provide incentives to make products and services more reliable. That is why flying is so safe and is becoming safer every year.

The government run railways, on the other hand, have had an abysmal safety record over the years. Why? Because the bureaucrats responsible did not lose their jobs. They will continue to receive their pay even if they don’t perform. They will still receive promotions based on seniority, again, regardless of their pathetic performance.

What about the politicians? When Modi and Suresh Prabhu announce compensation to victims and their families, they are not paying out of their own pockets. We, the taxpayers, are on the hook for that money. Every time the bureaucrats and politicians commit such a monumental blunder, we pay for their mistakes.

The railways won’t go bankrupt, because like every government venture, they will be propped up with taxpayer money. The manufacturers of the trains and tracks will not go bankrupt. They get contracts from the government, based not on quality, but their connections with politicians.

The trouble with government employees is that they are not accountable. They pay no price for their mistakes, no matter how large. That is why those working in the Indian railways have no incentive to ensure passenger safety.

That is why the railways must be privatised, not only to ensure better quality of service but more importantly, to save countless precious human lives.

Mandatory Maternity Benefits: Help or Hindrance?

In its enthusiasm to enable more women to enter the labour force, the government has taken steps that will ironically deny job opportunities to those women who need them the most. The government has made it mandatory for employers to grant 26 weeks of paid leave to women who have a baby, up from the earlier 12 weeks.

Mandatory maternity leave increases the cost of hiring women. The employer has to pay women even while they are not working, plus has to hire replacement workers for the duration of the leave. In effect the employer will have to spend a two person wage to get a one person job done.

What would employers, who want to maximise their profit, do in such a situation? They would hire men and older women, since these people are not going to take 6 months off to have and nurse a baby. This has been true even in the so called “developed” countries in the west.

For example, a survey in the UK found that at least 40% of the managers avoid hiring young women to get around maternity leave. Keep in mind that 40% admitted to doing this, and the actual number could be much higher, but not reported for fear of prosecution or bad publicity.

But the employer is not at fault. It is the law which forces employers to discriminate against young women by denying them jobs which would enable them to become at least a little bit financially independent. Moreover, employers are forced to discriminate against young women who come from lower income families.

Why? Because of supply and demand. If a woman is born to wealthy parents, she has the best education money can buy. She goes to a great school, a great college, and might even go abroad for higher education. This makes her more valuable to the employer. She would receive maternity leave even without the law mandating it.

Even men who are highly educated and skilled get paid leave when they have a baby. This is because qualified and skilled employees are difficult to replace, and can therefore command a higher price in the job market, either through direct salaries, or fringe benefits such as paid maternity/paternity leave, help with parenting issues, and flexible working options. It is not love for employees or their children that makes employers provide such facilities. They do it because it is profitable.

However, if a woman comes from a poor family; her education will be less than ideal. She goes to a low cost private school, or worse, a government school. Her parents cannot afford to send her to college. Such a woman would qualify only for low skill-low wage jobs, such as factory work, where she can be replaced easily. It is simply not profitable for employers to hire her when they can hire a man for half the cost.

More than the money itself (which is not much), a job would give these young, unskilled women a chance to overcome the hurdles of a lousy education; by learning from experience on the job and eventually moving on to higher paying jobs and making a better life for themselves in the future. But unfortunately this measure by our wise and generous benefactors in New Delhi will deny them that opportunity.

Free Markets will solve India’s Kashmir Problem

As I write this, 16 people have been killed in Kashmir as a result of violent street protests triggered by the death of a militant at the hands of security forces. And there is nothing new or unusual about this. Almost every other day there are reports of Kashmiri civilians pelting stones and getting into clashes with security forces.

Why is there so much tension in Kashmir? There are some common conclusions I have seen people jumping to. Some say it is because Pakistani militants create trouble in the region. But that is contradicted by a recent report in the Indian Express saying that most militants are Kashmiri locals and not from Pakistan.

And why does the civilian population support these militants? One most commonly floated conspiracy theory is that the Pakistani government is funding dissent by using fake currency. That’s nonsense.

The root cause of tension is the economic isolation of Kashmir from the rest of India. People from the rest of India cannot buy land, set up a business or think of settling permanently in Kashmir. The government does not let them. It is this curtailment of economic freedom which causes tension.

A comparison will help to better illustrate this point. If you ask yourself where, in India, you would find the greatest harmony and peace among people, probably cities like Mumbai, Delhi and Bangalore would come to mind.

In Mumbai, where I live, we have politicians who say that north Indians are a menace and should be expelled from Maharashtra, and have repeatedly tried to incite violence against north Indians. People just ignore them, and they are soundly defeated in every election. Why do divisive politicians have no influence in Mumbai?

Because in Mumbai, we have great economic freedom. North Indians (and people in general) are free to live and work here. They are our customers and business partners. They are our neighbours and co-workers. They are also the maids who clean our homes. They are the drivers and security guards. If they go away everything would become more expensive for us.

In Mumbai, people don’t care whether you are a man or a woman. They don’t care what language you speak, what your caste is or what religion you practice. They only care about what you are selling and at what price. These impersonal forces of the free market ensure that a Mumbaikar, who might not like north Indians, still does business with them and co-exists peacefully.

That is why economic freedom is so essential, not only for efficient wealth creation, but also to promote peace and harmony among diverse people.

Now ask yourself, why do divisive politicians and separatist groups have so much influence in Kashmir? Because Kashmiri people have seen Indians in mainly two ways. As aggressive military personnel who oppress them, or as oblivious over privileged tourists who stay in Srinagar for a few days, do some shopping and go back.

If people are allowed to do business in Kashmir, to work and even permanently settle there, they will become as much a part of life in Kashmir as north Indians are in Mumbai. Only when Kashmiri people do more business with the rest of the Indian people will there be a lasting peace.

What governments have been doing, since time immemorial, by curtailing economic freedom is that they have been tearing apart the fabric of our society.