The politics of the welfare state are simple – the government provides largesse in exchange for votes. That largesse has to come from somewhere, and government does not create wealth – so it must take wealth from those who are not its clients, in the form of taxes. Typically that is resented. Thus, you have to maintain a majority that is or could become a client of the welfare state and thus will vote for it, or that is employed by it. And the taxes that pay for all that are what keeps most people from becoming financially independent of it. It’s a self-fulfilling machine, politically. This was the New Deal / Great Society.

But economically a welfare state can work only with a small client base and a large class that is financially independent of government and yet supports it. So the welfare state model described above must fail and did fail – without organic growth the Fed had to inflate to fuel the economy, and it all washed up on the beach in the 1970s as stagflation.
Volcker HAD to do what he did, if he didn’t, we’d still have stagflation today.

But he was able, politically, to do it because the tax cuts triggered organic growth, thus reducing the pain of monetary tightening.

The series of tax cuts we’ve had since 1981 have resulted in more economic mobility, in growth of earnings – real capital – thus less reliance on inflated currency for short-term growth. The result has been an almost uninterrupted 30 year boom, which has significantly enlarged that class of people who are financially independent of government – who are not potential clients of the welfare state. We “live paycheck to paycheck” in that we spend what we bring in, but we spend most of it on things we don’t need such as cable tv, internet, vacations, a new grill, marble and granite countertops, hardwood floors, homes 50% larger than homes in the 1970s – not the same thing as someone who makes only enough to pay for rent for a studio apartment and groceries.

perspectives on european politics and society