So what will change?
Posted by aogFriday, 16 November 2012 at 09:53
TrackBack Ping URL
As we watch the American Street vote to repeat the 1930s I think it might be a bit different this time around.
One view that I held in the past but have changed is the long term viability of social democratic governments. In the 1980s it looked to me like you could have a large welfare state if you were willing to accept relatively higher unemployment and much slower growth, as exemplified by the European model.
Thirty years later things look much less sustainable. The corrosive effects and lack of limits predicted by the free market ideologues are playing out as we watch, except in those nations (such as Sweden) who are shifting back towards a more limited state. This points out a key difference from the 1930s which is that states are already large and heavily indebted, there is no slack in the system as there was then. Keynsian economics has been shown to be mostly unimplementable in the real world because governments will not cut back on spending during boom times as Keynes’ theory required. The debt just keeps mounting and it’s becoming clear that even the anemic growth we see is dependent on that borrowed money. What happens when the cost of borrowing goes up and becomes larger than the artificial growth it induces?
Now and then, here and there, we have seen pull backs from this decline (New Zealand, Margaret Thatcher, Reagan) but even those were rather limited and temporary. It is an open question how things will proceed over the next 10 years or so. It doesn’t seem possible that even the USA can continue to borrow 40% of its budget year after year with out end. If something can’t go on forever, it won’t but that doesn’t tell you when or how.
The doom and gloom crowd thinks that way because they look at Argentina and see how a once democratic and prosperous nation end up fascist and broke. The challenge here is to indicate how the doomers are wrong - what will stop our following the same path as Argentina, given the massive personality cult that is operating on behalf of our current President, the policies of his party, and the willingness of voters to vote for continued economic malaise. While I am generally very harsh in my comments on the EUlite I must admit they seem to have a lot more self control with regard to welfare states. None of them have grown their government programs at the rate Obama or even Bush have done so I think it very plausible that the USA could easily go in to decline faster than Europe has so it’s unclear how much of a useful bad example Europe will be over the next decade.
Friday, 16 November 2012 at 18:51|
I think it is going to be far different, but for different reasons.
Perhaps the most important factor, and which has been getting some press recently, is the very real likelihood of the emergence of Saudi America. Hubbard Peak Oil proved the attractiveness of sciencey-sounding TLAs (hat tip to Peter), but nothing else. That means there is the possibility of taxing energy exports to greatly reduce, if not eliminate, government debt. And given the overall size and diversity of the US economy, there isn’t any chance doing so will lead to the sorts of ills that typically befall extraction economies.
Fortunately, there are and will be plenty of cautionary examples to be had. Greece, and, more locally, California which is now apparently a one-party state. Yes, people will vote with one eye on their self-interests, but I don’t think most voters are stupid. They fully realize that the spending spree can’t go on forever, and are at least numerate enough to comprehend that taxing the well off — no matter how high the rate — isn’t going to come anywhere close to solving the problem; moreover, I think most Americans are receptive to fairness arguments, one of which being that the top 20% of earners pay nearly 70% of income taxes does not probably horribly deprive everyone else.
Also, the Republican party can (must) reject its coercive approach to social issues — it can’t be intrusive government and small government at the same time. And once it ditches that, it can obtain far wider appeal by emphasizing personal freedom and responsibility, as well as much smaller and decentralized government. Lord knows collectivists won’t.
In the 1930s, the zeitgeist was essentially fascistic; everybody took it for granted that centrally planned, collectivist, economies were the way to go, because an economy without an underlying plan and goals couldn’t possibly keep up. Even into the 1980s, the British Labor Party advocated nationalizing the means of production. No one, outside of Chavez, Castro, and the Norks — all additionally cautionary tales — believes that anymore.
Finally, while the level of indebtedness a government can reach before it can stop borrowing isn’t clear, it is even harder to know what the effects of printing money to pay off debt would be. The obvious answer is rampant inflation. But with productivity and technology increasing and advancing as they have (and didn’t during the 1930s), we are living in a deflationary period (CPI be damned). As Orrin has said many times, and is probably right most of them, nothing is getting more expensive. There is probably a fair amount of money that could be run off the presses before demand-pull inflation could be even a remote possibility.