January 3, 2011
The Coming Political Upheaval
The late Murray Rothbard, famous Austrian economist and libertarian, published a collection of essays under the title Making Economic Sense. One subsection was entitled "Politics as Economic Violence." That phrase described, in Rothbard's view, politics' contribution to society.
Rothbard's reasoning was simple: Economics is the interaction of people freely making choices while subject to minimal restriction (no theft, coercion, fraud, etc.). Politics is coercion to force outcomes that otherwise would not occur. Thus, politics is violence against economics, or people, because it precludes freedom's running its natural course.
A couple of centuries earlier, Thomas Jefferson expressed the same sentiment:
Rightful liberty is unobstructed action according to our will within limits drawn around us by the equal rights of others. I do not add 'within the limits of the law' because law is often but the tyrant's will, and always so when it violates the rights of the individual.
Rothbard, as was often his way, came up with an incisive way of categorizing government activity. Little that government does is not violence against economics. Virtually every government program involves coercion to achieve an outcome that free individuals otherwise would not choose. Otherwise, there would be no need for the program or legislation.
After decades of violence against economics, the economy hovers on the brink of destruction. There are too many to list, but some of the political fallacies that brought us to this point are the following:
- Bigger government means more prosperity.
- Everyone is entitled to own a house.
- Non-producers are entitled to live at the expense of producers.
- Deficits are good for the economy.
- Government can spend your money better than you can.
- Printing money can increase real wealth.
- The economy can be managed by a central authority.
As a result of these and other false precepts and decades of applying them, the economy is in shambles:
- Few jobs are being produced.
- Dependency has become a way of life for many citizens.
- Wealth of current and future generations has been squandered.
- Infrastructure has been neglected.
- Government is drowning in debt and other promises that will never be honored.
- Jobs, investment, and talent have been driven overseas.
- Businesses face arbitrary penalties, sanctions, and a weakened rule of law.
- Living standards have been reduced.
The continuing political violence against the economy has rendered the milk cow dry.
The damaged economy can no longer sustain the lifestyles that the American people have experienced for the past couple of decades. Much "prosperity" was phony in the sense that the credit bubble encouraged people to live beyond their means. Now begins the de-leveraging phase, where people must live "below" their means in order to pay down debt.
The corpulent political class cannot be sustained, either. Government tax revenues are insufficient to support spending. Government faces its own de-leveraging problem. Debt obligations and social promises cannot be met. Deficits cannot continue indefinitely, and the eventual rise in interest rates will impose new burdens.
For the first time since 1913, when the federal income tax and the Federal Reserve were instituted, government no longer can count on ever-increasing resources.
If politics can exercise violence on economics, might the reverse be true?
Economic laws, abused for so long, are now back in charge. They, rather than politics, are reshaping our economic and political possibilities.
In the fantasy land that is politics and modern-day media, assertions will be made that economics is now committing political violence. Such statements reflect ignorance and prejudice. The public sector is more important than the private sector, at least to these convoluted minds. Crass concepts such as supply and demand, limited resources, and other constraints should apply only to the hoi polloi, not the political elite.
But economics is not a force. It cannot commit violence or coerce in the sense that politics can. Economics is merely a loose body of "laws," not unlike physics. To say that economics commits something would be equivalent to saying that gravity commits murder when a person jumps off a building.
Politically outrageous promises have hit the wall of limited resources. Reality is here. No amount of bluster or legislation can alter this fact. The laws of economics and mathematics are controlling.
Government greed and mismanagement seriously wounded the golden goose. It is poetic justice that the political excesses that created the financial crisis will be instrumental in terminating the era of political dominance of economies.
It is tragic that so many citizens and their descendants will have to pay such a high price.
Here Come the CasualtiesThe first governmental casualties will come at the state and municipal level because these have no access to a money printing press. The first sign has already appeared:
Alabama Town Defaults on Pensions, Breaks State Law; Renewed Calls For San Diego Bankruptcy; "Prichard is the Future"
The dubious honor of being the first city in the nation to completely default on pension obligations goes to Prichard, Alabama. The city has sought bankruptcy protection twice and is flat broke. It faces a choice of paying to keep city services like police and garbage running or pay pensions. It selected the former.
There is no other way out. Prichard is merely the leader of a forming parade which will stretch out over several years and include hundreds if not thousands of others. Unfunded pensions will generate defaults, if not outright sovereign bankruptcies.
Precarious conditions in three other locales were recently highlighted by Mish:
- Pensions Eat 70% Decatur, Illinois Budget
- New York's Exploding Pension Costs
- Houston Mayor Wants Pension Benefit Cuts
Shortfalls developed as states and municipalities diverted pension funds to current expenditures. Politicians try to fudge the laws of economics, which sometimes provides a short-term political expediency. Eventually, though, economic laws take on the force of mathematical certainties.
When the money is gone, it is gone. We are very near that point, and that will make for interesting politics.
The Political Upheaval
The world has changed as a result of the economy. More than living standards will be affected. The political calculus of the country has been irreparably altered.
The states in need of the biggest bailouts are the blue states. The 2012 election will be Democrats eating their own as a result of state budgetary problems. As I wrote last year:
States should recognize their coming vulnerability and commence real budgetary reforms. Given the nature of politics, proactive steps are unlikely. Rather, we are likely to experience the bizarre scene of large Democrat states flirting with financial ruin while Obama attempts to avoid personal ruin.
By the 2012 election, the federal government will be struggling to avoid its own default, even with Ben Bernanke running his presses. Some municipalities and states will have reneged on various obligations. Survival of government at all levels will be an issue.
The 2012 election will be a pivotal event for the Democratic Party. President Obama will be unable to bail out one of his last remaining support bases: the public service unions. The disparate interests that represented the party will be under great strain. Failure to uphold public pensions and wage levels may be the catalyst that ends the modern Democratic Party.
Undoubtedly, it may seem foolish to some that such definitive comments have been made with respect to political outcomes. After all, two weeks is a lifetime in politics. Yet there is an inevitability to this financial crisis that is destined to run over the excesses of both government and private behavior.
Republicans will not help Obama or his union supporters in this matter. Even if it were not good politics, it would be irresponsible to do so. Governments must live within their means. Given where we are, that requires draconian budget cuts everywhere.
The social welfare state, a dystopian vision from the beginning, has had its fifteen minutes of history. It now begins its slow descent into the dustbin, alongside so many other tragic experiments.
Monty Pelerin blogs at economicnoise.com.