Recently, we have been treated to the spectacle of protests, chaos and decline within the EU. A country or a national economy can be likened to the simple analogy of a wagon. Those who ride on the wagon are living off of more than they produce. They are the net beneficiaries of government largesse—of the modern welfare state. These programs were designed and implemented by their elected politicians as “bread and circuses” to cobble together winning coalitions and maintain incumbency. In various places in our national media, the term “euro-trash” has even been employed to describe the lost generation of young Europeans who aged 20 to 40 are either chronically unemployed or underemployed. They are the aimless beneficiaries of mature, cradle to grave, enabling, and incentive-destroying national welfare systems. When a large portion of a nation’s population in their prime productivity years is withdrawn from producing real output and wealth, the patient is indeed gravely ill. Those who are not on the wagon are, of course, pushing it. The pushers are the producers of real output and wealth, and it is they who pay for it all. If they grow weary, or there are too few of them, or if they finally defect to become riders, then we are past the tipping point. The wagon ceases to move and the welfare state must collapse without its source of funding. It is bankrupt. Witness Greece.
This example is disturbing in light of the just-passed U.S. national election. A successful constituency was apparently cobbled together and incumbency retained by appealing to a general national need or yearning for dependency. What has been offered to wagon riders? “Free” national health care, forgiveness and subsidies to stressed homeowners, larger and more extensive continuing unemployment benefits, continuing social security, more freebies for favored businesses and corporations, greater access to student loans (or student gifts), greater access to all manner of programs that defer the tough decision of actually going back to work. In a difficult economy, who could be against such comfort and largesse? Only those who realize that the government actually pays for nothing. Who does? Taxpayers (the wagon-pushers), government bond purchasers, and all of us who are hit by the hidden tax as our fiat currency is inflated to take the pressure off government bonds by monetizing them. In fact what has happened in our country is that the large pool of toxic private debt has largely been assumed by the federal government. This has hemorrhaged the national deficits and the stock of government debt. Now we are all (as taxpayers) responsible for it. Who is now lending? Not the deer-in-the-headlight, heavily regulated banks, at least not without federal threats and prodding. Rather, our government has become the lender of last resort and, believe us, the criteria for its lending is not economic efficiency. Rather it is the political agenda of pandering to the needs of an increasingly dependent economic constituency.
What has happened to our older American values of free markets, individual freedom, minimal government, and individual responsibility? Are they anachronistic and dead? Is there no spirit of individual achievement and economic success? Actually no, they are alive and well in some places such as the recently liberated economies and countries of Eastern Europe. They are also still held by a large number of Americans, but, unfortunately apparently only a very sizable minority of Americans. Perhaps the country has become a greater Scandinavia as exemplified by a recent comedy series targeted at Portland (Oregon) called “Portlandia.” In it Portland is described as a place where the dreams of the nineties are still alive, where Al Gore and global warming still loom large, and where the young can go to retire. Let’s hope that this is an unfair stereotype of Portland and its fine citizens and also an inaccurate description of where America is headed. Perhaps our 20 to 40 year olds will return to the values, not of their parents, but of their grandparents. We shall see.
Of course a major part of the sickness of our economy lies in enabling the covert government financing of expenditure through the creation of fiat money and monetization of the federal debt. Further contributing to our economy’s ills is the overhang of a ballooning pyramid of questionable credit enabled by the tired anachronism of fractional-reserve banking. Also there is the inefficiency of a credit market that has come to be driven less and less by the criteria of economic efficiency. It is these issues and what to do about them that are the core of our recent book, Capital as Money. You should read it.