The Inevitable Bankruptcy of the Socialist State

Howard E. Kershner

The future kingdom of Socialism will be a terrible tyranny of criminals and murders. It will throw humanity into a true hell of spiritual suffering and poverty.

- Fedor Dostoyevsky

A democracy cannot exist as a permanent form of government. It can exist only until the voters discover that they can vote themselves largess out of the public treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury - with the result that democracy always collapses over a loose fiscal policy, always to be followed by dictatorship.

- Alexander Tyler (in England 400 years ago)

Socialism teaches that a higher standard of living may be attained if the state owns and operates the means of production and distribution. To prove its case a Socialist government must continually spend more money to do more things for more people. Appropriations for welfare are increased. Subsidies for renters as well as home owners tend to grow ever larger. More money is spent for public housing. Social Security, Medicaid and Medicare payments grow larger. Pensions and scholarships rise while qualifying conditions for all of these are made easier.

Wages are increased. Hours are shortened. Fringe benefits are liberalized. There are more holidays, longer vacations and earlier retirement. The state must do all this to try to show that the people live better under Socialism than under free enterprise.

One group gets something. Other groups are unhappy unless they get as much or more. So, group after group, we go leapfrogging up the ladder to higher and higher costs of living. This is true because wages, direct and indirect, account for possibly 90 percent of the cost of goods and services. When they are determined by group or political pressure, they keep on rising year after year.

The Socialist politician who promises the most keeps himself in office. He is quite ready to tax ten people and distribute the proceeds to 20 people. Indeed, he will sacrifice ten votes if he is pretty sure of getting 11 or 12 in return. Once we concede to government the power of taking money from some and giving it to others, the process will not stop until the last bone of the last taxpayer is picked bare and we are all reduced to something approaching a common denominator. That is to say, under Socialism all except the top bureaucrats, their favorites and essential technicians are headed for the poverty line.

Alternatively, under the free market where each one is paid in accordance with the value his fellows place on his contribution to society, each one gets all he earns. This is the just and equitable way to determine wages. When wages are decided by political pressure, as is true under Socialism, large groups that can control many votes or strategic groups controlling essential services are always able to get more than other citizens. That's what drives the cost of living higher and higher under Socialism, leading to more debt, inflation and eventually to bankruptcy.

Many people like Socialism. An increasing number have learned how to live from the labor of others. They get but do not give. They enjoy benefits to which they do not contribute. Others know that Socialism will cost them something, but they think they will get more than they must pay. As long as they believe that, they will continue to vote for more Socialism. Almost any Socialist will vote for his neighbor to get more if the "more" he, himself, expects to get, is a little larger than that of his neighbor. There is almost no limit short of bankruptcy to the amount that can be filched from the treasury by the log-rolling process of approving benefits for others in return for their support of benefits for one's self.

Socialist regimes usually come into power after a long period of prosperity under freedom. As long as the Socialist government can distribute wealth accumulated under free enterprise, it can make a show of conferring benefits upon the public.

No Socialist system has ever shown itself to be the equal, or anywhere near the equal, of free enterprise as a producer of wealth. When wealth accumulated under freedom is all used up, life under Socialism becomes increasingly hard. It is so in all Socialist countries.

One reason why Socialist governments cannot produce abundantly is the difficulty they have of obtaining the necessary capital. There being little incentive to save, the Socialist regime soon finds itself short of capital. As capital investment declines, production declines, and scarcities become the rule rather than the exception.

Under pressure to do more things for more people, the Socialist state increases its indebtedness more and more until inflation brings on partial or complete repudiation.

As the Socialist state taxes its productive citizens more heavily for the benefit of its less productive class, it eventually crushes their initiative and incentive. Their production declines and they, one by one, join the ranks of the less thrifty and less responsible.

Taxes have removed them from the small class of highly productive citizens and have transferred them to the more dependent class. As this takes place, the Socialist state finds it harder and harder to keep up its production. It goes deeper and deeper into debt until bankruptcy, usually through inflation, takes place.

With increasing socialization the state itself is responsible for financing the expanding number of business activities which it takes over. The state is dependent for its tax revenues mainly on businesses operated by itself. These may not be well run and may be losing money, but for political reasons the state cannot permit them to fail. Since there is no private capital involved, there is no possibility of bankruptcy, and the state must continue to finance them by increasing subsidies drawn from tax revenue.

When private industries are improperly managed, the owners go bankrupt and lose their capital. When the state owns the business enterprises, politicians cannot admit this degree of failure and remain in office. They cannot resort to bankruptcy. Because the state owns the businesses, there is no private capital to be lost. All the state can do is to continue meeting growing deficits by the use of tax revenues and by increasing debt. Therefore, the taxing power of government is of necessity dedicated to the maintenance of the mathematical fallacy of long-term, compound interest.

To demonstrate this fallacy let us assume that one million dollars had been loaned at five percent interest, compounded annually, on the day Columbus discovered America in 1492. There would not be enough money in the world today to repay the loan.

At five percent compounded annually, money doubles in a little less than 15 years, or about seven times in one century.

At the end of the first century after Columbus arrived, that is, 1592, the loan would amount to $128 million. At the end of the second century, 1692, it would have grown to $16 billion. By 1792, it would amount to $2 trillion. At the end of the fourth century, 1892, it would have totaled $256 trillion, and by 1970, the total would be above $8 quadrillion.

Obviously, long-continued compound interest is impossible and any government dedicated to maintaining it will bankrupt itself.

Society has devised three ways of attempting to correct this error. The first was the ancient Hebrews'year of jubilee. Every fiftieth year all debts were to be cancelled and real estate returned to the original owner.

What happened under this ancient system is not clear, but it did not last long. It proved inequitable and, administratively speaking, impossible.

The second attempt to correct the error of long-continued compound interest was made by the private enterprise system. Under it, corrections are provided by the bankruptcy of the people who make mistakes; by compromise settlements, scale downs and other adjustments as between creditor and debtor.

This has the merit of penalizing not the whole public, but only the people who prove their inability to use money wisely. The public is unharmed while the individual alone must atone for his mistakes. If he uses poor judgment, his wealth disappears. If he seeks to produce something or render some service that cannot be marketed, he loses his capital. By such means the accumulation of impossible debt is prevented. Corrections are made at the point of error. Compound interest continues to function only in that portion of the economy which has not resorted to unsound practices, but has earned the interest on its borrowed funds from year to year plus at least a small profit.

Socialism makes no provision for bankruptcy or adjustments of impossible debt. Under it there is little private capital and the State is forced to increase its debt more and more. Under Socialism old debts are rolled over and serviced by new debts. New money is borrowed to pay interest on old debt. Indebtedness mounts higher and higher.

Private enterprise is flexible. Adjustments are being made everywhere all the time. This is not done under Socialism which can only resort to moratoria and to adding accrued interest to principal as debt rises into the stratosphere.

Indebtedness of the Federal government, our states and our cities rises continuously. No knowledgeable person expects that it ever will be paid. This is the way Socialism operates and it leads eventually to progressive devaluation of the monetary unit through inflation.

Public and private debt, plus contingent liabilities of our Federal government, now exceed $3 trillion, or about 50 percent more than the total value of all our public and private property.

The people of this country are now paying out possibly one-sixth or more of their income for interest on various kinds of debts. Under Socialism, as debt increases, an even larger portion of the earnings of the people will be required to pay interest. How long will it be until interest takes half - then still more! What then becomes of the standard of living?

A city, a state or the Federal government borrows at, say five percent. In the course of 20 years it pays* out as much in interest as the amount borrowed, and still owes the principal sum. This happens in the various units of government, that is, the Socialist sector. It does not happen to private business organizations. Under continuing abuse of credit they go bankrupt and disappear. Governments go on, with the amount of indebtedness forever growing greater.

A third way of attempting to offset this fallacy has been devised by the USSR. The Kremlin simply declares that one who has, say 100 rubles, now has only ten. This is partial repudiation and, if practised from time to time, will keep the state solvent though the people are robbed of their savings.

By penalizing the individuals who are incompetent or who make mistakes, private enterprise eliminates the less competent and brings to the fore the more competent. Under Socialism, on the other hand, the less competent continue in control and the public pays the bill through increased taxation to service ever-mounting debt.

Only the politicians who control the government, their favorites, and the technicians whose s'ervices they desire, can escape the penalties that Socialism imposes upon its citizens.

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Retirement Planning For The Golden Years

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