A state cannot run an economy and a state-run economy cannot sustain its state.
Today's European debate isn't about governmental austerity, it's
about governmental reality. Ultimately, the argument is not whether
governments can keep trying to stimulate their economies, but when
their creditors will quit financing it. Somehow, Europe's
governments, teetering on tilting economies, have missed this
point; we can only hope that Washington hasn't.
We are witnessing a prolonged domino-effect among the world's
economically intrusive states. It began over two decades ago with
the fall of the USSR and communism across Eastern Europe. Now the
dominoes are falling into Western Europe -- Greece, Portugal,
Spain, and Italy, all are threatened with economic
collapse.
By now, the obvious should be axiom: A state cannot run an
economy and a state-run economy cannot sustain its state. The more
of its economy a government consumes, the less productive its
economy becomes. And the more dependent its subpar economy then
becomes on its government.
This vicious cycle creates a widening gap between what the
government promises and what its economy can deliver. The
government resorts to spending more, while its economy responds by
producing increasingly less of the revenue needed to finance the
government's increasing spending.
The only reconciliation possible between the over-demanding
government and its under-producing economy is borrowing. Once this
pattern becomes firmly and deeply established, the conclusion
becomes inevitable. Political oppression -- as in both former and
current communist countries -- can temporarily extend the
contradiction, but it cannot extinguish it.
Of course, there are liberals who dispute this scenario -- just
as they dispute anything that questions the state's efficacy. They
claim that governments can and should do more -- that
government spending actually stimulates the economy.
There is no more than a limited truth to this: Simply because of
the way that GDP is calculated, government spending can make the
official numbers look better… temporarily.
However, over a sustained period, this amounts to merely cooking
the books. The problem remains that nagging gap between
governmental demand and economic production: someone has to finance
what the economy cannot.
Nor are the government's demands static either. Once political
promises of increased economic benefits are made, voters demand
that they not only be met, but expanded.
Equally important, as crisis looms, the economically
interventionist government finds itself less able to address it --
precisely because of its now routine expanded intervention.
In 1930, the year after the Great Depression began, federal
spending was 3.4 percent of GDP. By 1936, as FDR and the New Deal
faced reelection, federal spending was 10.5 percent -- a threefold
increase -- insufficient to end the Depression but still a sizable
proportional increase. According to the Congressional Budget
Office, over the last 40 years, federal spending has averaged 21
percent of GDP. To proportionally match the New Deal boost, federal
spending would need to be over 63 percent of GDP -- a politically
and economically impossible figure.
We therefore find ourselves dealing with quantitative, not
qualitative differences when it comes to economically intrusive
governments. All else being equal, the more intrusive will fall
first, yet even in the case of the less intrusive, it is not a
question of "if," but "when."
The gap is remorseless and must be financed. Capital is mobile,
while the government's clientele is stationary -- if not expanding.
The "demand" stays and increases, while the "means" flees to where
it is most rewarded and it takes ever increasing borrowing costs to
bribe it back.
Over the last four decades, the federal government has averaged
spending roughly one-fifth of everything America produces. Over the
last three years, it has averaged almost one-quarter -- spending an
equivalent of 24.5 percent of America's GDP.
America is approaching a point where it must ask what road it
wants to follow.
One is the politically easy, but economically impossible, route
of attempted government-induced prosperity. If this is the one
chosen, then Washington needs to start arranging its lines of
credit quickly. Which should be relatively simple at the moment,
since so many lenders now are fleeing Europe's collapsing
economies.
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