Death Spiral

Welfare States R.I.P.

This post appeared over two years ago, but remains relevant today.

“The worst thing in the world next to anarchy is government.” Henry Ward Beecher

Bloggers post what they claim to be the “scariest economic chart” or the “chart of the century.” Indeed, many data sets are frightening, but none more so than the one to the left. Modern government has failed. These countries are insolvent and will default.

Jagadeesh Gokhale compiled these figures on European debt. This data shows incontrovertibly that all western democracies are on death row. The unlimited welfare state is the cause. Some governments are delusional, believing they can continue on their present paths. Others cling irrationally to hopes of some miraculous reprieve. All are dead men walking.

Government has always been inefficient and mostly ineffective. For most of history that was inconsequential, because governments had limited roles. Monarchies and various forms of authoritarianism had no reason to buy votes. That changed when participative government was instituted. The dangers of participative government devolving into democracy were well understood:

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.” – Alexander Fraser Tytler, 18th century Historian and Jurist

“Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide.” — John Adams

Otto von Bismark

Keynes

In the 1880s Otto von Bismark instituted the first welfare state. Other governments followed with varying time lags. The Progressive Era in the US created the Federal Reserve and the Federal Income Tax, both in 1913. They provided powers never intended by the Constitution. In the late 1930s the US started a social security system, the last developed country to do so.

Once democracy was unleashed, citizens voted themselves benefits. Keynesian economics assisted politicians in their quest for votes.  James Buchanan and Richard Wagner observed in Democracy in Deficit:

“With the completion of the Keynesian revolution, these time-tested principles of fiscal responsibility were consigned to the heap of superstitious nostrums that once stifled enlightened political-fiscal activism.”

The last barrier to fiscal irresponsibility was removed in 1971 with the introduction of universal fiat currency. In the last 50 years, the US has not had a true surplus. Keynes’ theory, which envisioned deficits in slow economies offset by surpluses otherwise, was co-opted by the political classes. In less than seventy-five years, all welfare states were insolvent. The graphic below depicts government debt to GDP ratios around the world:

From Financial Armageddon

Reinhart and Rogoff, based on their 800-year study of sovereign bankruptcies, determined that 90% of GDP was a criticalRead More »Welfare States R.I.P.

Dallas Fed Chief Says U.S. in ‘Budgetary Death Spiral’

I have used the term “Debt Death Spiral” which I think might be more appropriate. Richard W. Fisher, Dallas Federal Reserve president, speaks in terms of a “budgetary death spiral.” There is little reason to quibble over the terms — one focuses on causes, the other effects.

Technically, one could argue that it might be possible to end the budgetary spiral and not avoid the debt death spiral. That argument would be based on a “we have passed the tipping point” perspective whereby the refusal for the market to fund new and rollover debt and the rise in interest rates would be enough to continue the debt death spiral.

The article below is from Doug Ross and provides a discussion of our situation. Unfortunately, his lead sentence is likely to be true regardless of what Congress does. Enjoy Mr. Ross’ analysis:

Good News: Dallas Fed Chief Says U.S. in ‘Budgetary Death Spiral’

Earlier today, Dallas Federal Reserve Chief Richard W. Fisher had some blunt words for the Democrats in Washington. Put in terms even a liberal can understand: without dramatic budget cuts, this country is headed for a complete economic collapse

Think Road Warrior without the amenities.

There cannot be robust direct investment in the United States without confidence in the nation’s ability to reverse its budgetary death spiral, especially the inexorable accumulation of national debt and unfunded liabilities of Medicare and Social Security. [Ed: Oh, you mean the programs Harry Reid, Chuck Schumer and the execrable Kris Van Hollen are trying to destroy?]

…The need to break the back of that spiral is as dire now as was the need for Paul Volcker Read More »Dallas Fed Chief Says U.S. in ‘Budgetary Death Spiral’