A few years ago, Arnold Kling saw a great race between Medicare spending and technological progress (“Moore’s Law”):
| Four Scenarios | Moore’s Law Fails | Moore’s Law Succeeds |
|---|---|---|
| Medicare is Reformed | Low Gear | Capitalist Utopia |
| Medicare is Not Reformed | Economic Implosion | Affordable Welfare State |
The Singularity is behind schedule and the ruling class doesn’t seem to know what it’s doing, which could lead to an economic implosion or looting scenario:
Douglass North famously said that when the institutions of a society reward piracy, ambitious people become pirates. When the institutions reward wealth creation, people create wealth. In finance, our institutions did much to reward piracy in the past decade.
In the Looting Scenario, what is going to be rewarded is what we call rent-seeking. Basically, over the next twenty years, wealth transfer by government will be much more important than wealth creation — and the amount available for transfer could actually decline. For example, I expect that benefits for the elderly will become increasingly means-tested and savings will be increasingly taxed, to the point where the marginal return to saving will approach zero. If the marginal return to saving is low, and government deficits are high, then capital formation is going to be low. It’s hard to see how you get rapid innovation in that kind of world.
The Looting Scenario is one in which public employees and pensioners have the incentive to just take as much as they can while they can get it. It is a scenario in which people talk about the deficit, and wise heads say we must do something about it, but the only politically feasible approach is to raise taxes. Even so, it turns out that higher tax rates bring in less revenue than projected, because of the incentives to consume leisure and engage in black-market activity.
Seven years ago, it would not have occurred to me that our ruling class would be so bad that the Looting Scenario would be likely. My guess is that, even among libertarians, just about everyone else still has faith that our ruling class will not let the Looting Scenario take place. However, I think it is one of the higher-probability scenarios out there. Where others think of the upper bound of incompetence as, say, Jimmy Carter or George Bush, I think about truly historic blunders that make Carter and Bush seem brilliant. I see our current economic strategy as comparable in folly to the “search and destroy” strategy in Vietnam or the mass offensives of World War I. So, if I sound crazy on this blog, that is where I am coming from.