The end of the unholy marriage of political greed with faulty economics nears. Politicians, eager to expand their power and wealth, quickly saw the advantages of Keynesian economics. After seventy years of increasing economic witchcraft, the world is cracking. Politicians have succeeded beyond their wildest dreams. They have gained control (and ownership) of the economy and created great personal wealth for themselves in the process.
All of this is coming to an end. Tyler Durden explains:
The standard Keynesian narrative that “Households and countries are not spending because they can’t borrow the funds to do so, and the best way to revive growth, the argument goes, is to find ways to get the money flowing again.” is not working. In fact, former IMF Director Raghuram Rajan points out, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side as technology and foreign competition means that “advanced economies were losing their ability to grow by making useful things.” Detailing his view of the mistakes of the Keynesian dream, Rajan notes “The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.”
It is the distortions on the supply side that have created the current problem. For at least fifty years politicians have papered over each downturn. The result has been to mitigate the severity of each slump, but doing so by propping up companies, prices and investments that should have adjusted. Instead, these distortions were enabled and continued in the system. After decades of such economic interventions, the misallocation of labor and capital has crippled the economy’s ability to function. Small costs avoided have built into a massive cost directly ahead.
Durden summarizes the choice ahead:
The industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities. For better or worse, the narrative that persuades these countries’ governments and publics will determine their futures — and that of the global economy.
Political greed is a given. There is no hope of changing that. The Constitution held it in check for a while. When the Progressive Movement, aided by Keynesianism economics finally weakened these constraints, politicians leapt at the opportunity to control the economy. This loosening of Constitutional constraints turned our democratic process into a “spending as bribery for votes” contest. The country has gone so far down this road that the possibilities of politicians ever relinquishing this power is slim to none. There are several reasons why they will not. Two primary ones would require them to admit:
- Government has been the root cause of economic problems
- Government is too large and too interventionist and needs to be dramatically curtailed both in terms of power and spending
Few who have held political office during the last fifty years accept either of these points. Current politicians and politician wannabes have been drawn to the profession (it used to be a public service; now it is a profession not unlike prostitution is a profession) based on the belief that government can and must solve all problems, grow bigger while doing so and make it possible for elected officials to become wealthy in the process. The mindset of these politicians cannot comprehend the above two conditions.
Sadly, voters are in a somewhat similar position. They have been conditioned to the myth that government creates wealth. The private sector is merely a necessary evil. Government must control this evil to protect the rest of us from their predatory exploitation. This conditioning of the public was necessary in order to implement political plunder. This plunder is used to enrich politicians directly and to bribe votes with the plunder. The rationale is never stated so bluntly. Rather it is justified in terms of making society “fair” and helping the poor.
Government officials believe that government is indispensable and needs to do more rather than less. A large proportion of the population, primarily the dependents and crony capitalists, have been convinced to believe the same. Under these conditions, it is impossible to enact a political solution to current problems. Neither side can compromise on spending cuts for any proposal ends up in perceived harm to one or the other. It is even worse than that because any politician who admits the truth about what has gone on and what needs to be done is committing political suicide. He is unilaterally disarming himself against his opponent and leaves himself open to charges of “meanness” and “unreasonableness” by an opponent who will run against him on the premise that things can continue as they were.
Recent elections in Europe demonstrated this point. Those proposing austerity (the Austerians) lost big to those promising to continue or even increase spending. In truth, even those who professed austerity really never addressed the problems except in Greece. There it became impossible to borrow more money to continue the charade. Austerity was not chosen in Greece, it was imposed by markets. For the rest of Europe there were fake claims of austerity — not real cutbacks. Politicians who even talked this phony game were swept out of office. Their replacements will only accelerate the Greek-type tragedy that lies ahead for these countries.
The ending in the US will be similar to that in Greece. It is assured for the same reasons. Obama will lose the 2012 election, but that will be a vote against his incompetence and economy. Republicans will control government for the next two years. If they try to cut spending, they will suffer the same fate as the European Austerians. My guess is that they will prefer to stay in office rather than be removed. Politicians are not heroes. They are self-interested animals out for all they can get.
Whatever enthusiasm exists when Republicans gain control will soon dissipate as soon as the polls show how unpopular austerity is. Regardless, whoever wins this election is likely to be branded by historians as the new Herbert Hoover. It is unlikely that a Depression can be avoided for the next four or five years.
Voters given the choice between someone who promises to take their ice cream away and someone who promises to increase their ice cream will vote for the latter. That is what fifty years of conditioning has done. Eventually there will be no juice (taxes, borrowing or printing) left with which to produce and distribute the ice cream. Bond markets or hyperinflation will end what politicians refuse to do.
The most recent democratic republic will end up like the first — a Greek tragedy.