The bailout of Greece may not work. Spain is teetering on the edge of serious financial doom. The Euro is taking a beating. And the banks of Europe are not looking too healthy overall. Meanwhile, here in the States, unfunded government debt, already expanding at an unprecedented rate, is set to explode. What do all of these things have in common? They are the direct result of expanding the welfare state without any means of actually paying for all of it.
In truth, there is never a way to pay for expanding the welfare state because, while wealth creation isn’t a zero-sum game, the population of wealth-creators is; after all, not just anyone can create electricity, telephones, heart medications, MicroSoft, Wal-Mart, or even pencils without some know-how, sweat and inspiration. If that were possible, then wealth creation could never be retarded, regardless of the impediments. Some wise, noble, and completely selfless individual would always emerge to drive the economy forward. Alas, self-interest trumps all, without which wealth-creation is for the horses.
No matter how ingenious the plan, or divine the motives, the only way for governments to fund the welfare state is to tax the wealth-creators. As even the most Marxist of intellectuals knows, if you want less of something, then tax it. This is why cigarettes are levied against in ridiculous proportions, and why carbon taxes are considered (by some) to be the savior of our planet. Well, taxing wealth-creation works exactly the same way: tax it more, and you will get less of it. Which leads to the inexorable conclusion that, as the governments of the world sink deeper into fiscal crisis, the looters will be coming en masse.
Does that mean that we are in for another Great Depression? Not necessarily. In fact, I predict that no such thing will occur. For starters, we have many institutions in place today that didn’t exist in the 1930’s such as the FDIC, Social Security, Medicare, the IMF, and the World Bank. Some of these things are arguably beneficial in that they smooth out the rough patches that economies inevitably encounter. The U.S. economy, for example, may not have realized the devastation it did if old people, like McQ, could have survived without taxing their families’ resources so much, or the FDIC had been in place to quell bank runs. Maybe. But more importantly, in this day and age our politics and law-making bodies (and those of every democratic society) are dominated by those whose own self-interest is firmly grounded in the ability to buy votes. That ability is highly dependent upon feeding the welfare state, since the vast majority of votes are bought from those who don’t create electricity or heart medications. This is why politicians of all stripes won’t take steps that would decrease the welfare state, because to do so will cost them votes — to the politician who promises more largesse at the expense of whatever hated rival is being villainized at the time. Accordingly, the odds are rather stacked against wealth-creators continuing to employ their skills in service of the very state that punishes them.
Instead of the Great Depression, Part Deux, I would predict that the elites (those, and their friends, who hold the power to dole out goodies for votes) will shuffle the deck just enough to ensure that they stay in favor, while allowing the overall health of the economy to softly fade into oblivion. They are like Dr. Kevorkian administering to capitalism. The ability to create wealth will slowly continue to be arrogated to the governors and “experts,” while the welfare state expands in decrescendo. Eventually, we will be left with something akin to the Ottoman Empire: all power and glory in name only, inside a rotting shell, harkening back to a time so dissimilar as to be unworthy of the title. What’s left will be hopeless, farcical and cruel, and will not have the slightest ability to nurture the welfare state that started it all. Perhaps the “Long Morose” would be a better title.
Irrespective of my gloomy predictions, there simply isn’t any question that, at some point, the beneficiaries of the great welfare state will have to take a bath. Most likely, that day will come when everyone jumps in the tub together. Until that time, prepare for the politically powerful to loot the wealth-creators out of existence in order to pay off the welfare beneficiaries. Eventually the only ones left to take that bath will be the filthy and the unwashed.
In a little noted Financial Times article yesterday, it reported:
The European Union’s public debt could by 2014 rise to 100 per cent of gross domestic product – a year’s economic output – unless governments take firm action to restore fiscal discipline, EU finance ministers will be warned on Monday.
The EU claims that the measures the countries of the union took to “rescue Europe’s financial sector and combat recession” are to blame.
But then, 7 or 8 paragraphs later, we get to the real “tip of the iceberg”:
The Commission identifies five countries as at particular risk – Greece, Ireland, Latvia, Spain and the UK – because their public finances will come under strain from large increases in pension and healthcare costs, and high deficits triggered by the financial crisis.
This is particularly the case for Greece, which faces the second-highest increase in age-related expenditure in the EU, while its high debt ratio adds to concerns on sustainability.
Pension and health care costs? Translated into US lingo – Social Security and Medicare. You know the two programs with 50+ trillion in unfunded future liabilities? So tell me again why we want to go even further off this debt cliff by enacting government run health care?
Now I know you’ve been led to believe that Euro socialism is magic and that their health care delivers amazing care at much less cost than ours. But in reality, it doesn’t do better on either measure. The 5 countries listed above are only those in the “worst” shape. Any guess what they’ll have to do to bring their “free” health care costs in line, so, like Greece, they won’t see the cost at 135% of GDP next year?
Cuts in spending. Cuts in benefits. Cuts in care. Rationing.
And for countries like the UK, where the medical workers work for the government, what options or choices will medical consumers be left with? There is no real private market. Government killed that decades ago.
Is that really what we want here? My goodness, the evidence is out there and many of us seem to want to remain willfully blind to the consequences of what we’re considering here in countries who are now doing it. The arrogance and hubris of that is simply mindboggling. Want to see the economy killed and debt skyrocket? Hope the Senate passes “health care reform” then. We can race Greece to see who can run up the biggest percentage of debt vs our GDP. And given the way this Congress and President think, we’ll “win”.
It is certainly worse abroad than here. As Dale pointed out, if this is a failure of the “free market” why is Europe, which is very tightly regulated, having a worse time than we are? Ambrose Evans-Pritchard has a blog post outlining the woes of Europe. First, the real possibility of repudiation of debt:
Ex-Bundesbank chief Karl Otto Pohl has just said that Ireland and Greece are in danger of defaulting on their sovereign debts and/or may be forced out of the Euro, for those who may not be aware of his Sky interview by my colleague Jeff Randall.
“I think there are countries considering the possibility. It would be very expensive,” he said. “The exchange rate would go down, 50 or 60% and then interest rates would go sky high because the markets would lose all confidence.”
Then we have the possible abandonment of the Euro in order to “re-establish economic competitiveness quickly”:
Laurence Chieze-Devivier from AXA Investment Managers — in “Leaving the Euro?” — says that the rocketing debt costs of Ireland, Greece, Spain, and Italy are taking on a life of their own. (Italy has just revised is public debt forecast from 2010 from 101pc to 111pc. That is a frightening jump. While the CDS default swaps on Irish debt is are at 376 basis pouints. Austria is at 240. This is getting serious).
It is far for clear whether all these countries will accept the sort of drastic retrenchment required to stay in EMU. “By leaving the euro, internal adjustments would become less `painful’. An independent currency would re-establish economic competitiveness quickly, not achieved by a sharp drop in employment or wage cuts”.
The possible death of the “European nation”:
Carsten Brzeski for ING in Brussels said the eurozone laggards were more likely to default than pay the punishing costs of leaving EMU.
“It is difficult to believe that Portugal, Italy, Ireland, Greece, and Spain, would be better off outside the eurozone. While a government could possibly get away with a redenomination of its debt, the private sector would still have to service its foreign debt. We believe any attempts to leave monetary union would lead to the mother of all crises, and total isolation in any future European integration”
Mr Brzeski said the bigger danger is that countries will face a buyers’ strike for their debt as a flood of bond issues across the world saturates the markets.
“A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries.”
How is that likely to happen?
The country’s parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. “Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany”.
Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US — but concentrated in a much shorter period. “Banks would be forced to call in outstanding loans, bring about a collapse in the country’s business.”
Certainly a bit of a doomsday scenario, but, unfortunately, not at all outside the realm of possibility. In fact, as they are, some are arguing it will happen in the near future. Almost every bit of it the result of market distortions implemented or enabled by government.