The Looting Scenario for America

April 13, 2010

The Great Arnold Kling thinks there is a high probability of a two-decade economic fiasco, outlined below.

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.

2 comments

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Could everybody just take a chill pill please? My, my, Obama hasn’t been in power for even eighteen months yet and already everyone is writing obituaries for American free-market capitalism. Do you honestly believe that American capitalism is so weak, so sickly that, under attack by some left-liberal ideologues in the White House, it will collapse and vanish? My late father once remarked that Americans tend to take things to extremes and, as usual, he was absolutely correct. Show some faith in your country for a change, faith in the common sense of the average American voter, and faith that the Obama foolishness, like the Carter foolishness, will soon pass.

Posted by Gotthardbahn | Report as abusive

Current trends in US ethnic demographics will continue to reduce the amount of wealth available for transfer.

When people say that betting against the US has always been a losing wager, they forget — or don’t want to acknowledge — that they’re not talking about the same country.

Posted by Mega | Report as abusive