Government gone wild

Monty Pelerin Contributor
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Apparently Russia understands basic economics and self-control better than the Obama administration.

While we continue to spend wildly, increasing our deficits and debt, Russia seems to recognize reality. President Medvedev, according to Russian news sources, will cut 20% of federal officials by 2013:

Russian President Dmitry Medvedev signed on Monday a decree reducing the number of federal officials by 20% until 2013, the Kremlin press service said.

The decree follows the instruction made by Medvedev in June. The measure could save up to 40 billion rubles ($1.3 billion) out of the Russian federal budget.

The US, despite an unequivocal message sent by the electorate, continues to spend. The “Obamacare” entitlement was passed over the wishes of the public, even though other entitlements are insolvent.

Why this behavioral divergence between the two governments? Has Russia suddenly become more capitalist than the US? Are they more responsive to their citizens than the US?

The answers reside in history. The Russian government knows scarcity. For 90 plus years, it dealt directly with (and created) shortages. Communism made the government virtually 100% of the economy. Economic problems by definition were its problems.

US government began small with few responsibilities. The private economy produced unprecedented wealth and income. The US economy grew to become the largest in the world, with a standard of living unmatched.

The different reactions of the two governments can be traced back to these origins. The Russian government started out as both governor and employer. When something went wrong, it was responsible. The US government, on the other hand, started as a “night watchman.” If something went wrong, it was someone else’s fault and provided an opportunity for government growth. Any perceived problem became an excuse for government aggrandizement and the shifting of more resources away from the productive sector.

Once begun, government growth was furious. Total government spending in 1913 amounted to less than 5% of GDP. Today, it approaches 45%. In real terms, the government grew 160 to 170-fold, nine to ten times faster than the private sector.

This rise was directly related to the decline in the importance of the Constitution. Up until the 1960s, the Constitution still was respected, if not strictly obeyed. According to Joseph Sobran:

… the federal principle remained strong long enough that during the 1950s, the federal highway program had to be called a “defense” measure in order to win approval, and federal loans to college students in the 1960s were absurdly called “defense” loans for the same reason.

Things changed rapidly, as Sobran noted:

By 1973, the federal government was so powerful that the U.S. Supreme Court could insult the Constitution by striking down the abortion laws of all 50 states …

Contrast Sobran’s first comment with that of Democrat Speaker Nancy Pelosi. When questioned by a reporter on the constitutionality of Obamacare, stunned by the question, she stammered: “Are you serious?” The implication was that anything Congress did was legal.

Our Founding Fathers tried, unsuccessfully, to protect against what has happened. As they feared, we have a predatory government with the “right” to raid the productive sector at will. As Thomas Sowell so colorfully put it:

If you have ever seen a four-year-old trying to lord it over a two-year-old, then you know what the basic problem of human nature is — and why government keeps growing larger and ever more intrusive.

Spats between political parties occur over the size of government, but these disagreements are merely over the rate of predation. Both parties grow government at the expense of the productive sector.

The creation of the federal income tax and the Federal Reserve Bank, both in 1913 and both of questionable constitutionality, became the principal tools for government growth. Keynesian economics provided the (phony) intellectual cover to “require” the government to intervene in the economy.

As the productive-sector goose grew fatter, the parasite government bored in deeper. The work of the political elite was too important to deny. When taxes were maxed out in terms of voter resistance, politicians merely shifted to deficit financing or the creation of money. Just pass the costs on to the children and grandchildren in the form of debt or steal via the Federal Reserve. The ATM machine known as the Fed could just print money, something John Maynard Keynes characterized as theft:

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

The purchasing power of the currency, $1.00 in 1913, now purchases less than a nickel would have. Most of the deterioration occurred after 1970, a reflection of how government used currency debasement to continue to grow after citizens pushed back against taxes.

The use of deficit financing and the Federal Reserve provided slush funds for the government to increase spending without apparent cost to taxpayers. These two vehicles enabled government to grow much larger than would have been possible from tax revenues.

The US government’s history, up until now, has been virtually devoid of economic constraints. Want more money? Raise taxes. If that is too dangerous politically, then borrow the money. If credit markets balk, then the Fed will print money.

As Thomas Sowell pointed out:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

As a consequence of history and institutions, our politicians were able to behave accordingly. Their experience has been a world without limits. In their minds, this is the way things work. This political fantasy world is about to implode. The world, theirs included, has changed for the worse. They are about to crash into the laws of scarcity and reality.

The US economy has been seriously damaged from years of increasing predation. It will not be able to grow at prior rates, even after this crisis. Government is too large, produces no income or wealth and saps the strength of the productive sector. Ceteris paribus, 60% of an economy engaged in productive activities cannot produce as much as if 70 or 80 or 90% were engaged. This calculus now limits economic well-being.

The US economy has entered stagnation, the phase of an advanced welfare state. We are not much different from the European welfare states. Economic and political collapse is likely as a result of past profligacy for all welfare states. See Welfare States – R.I.P. for details.

History books written 100 years from now will refer to the 20th century as “The Myth of Government.” The coming collapses of welfare states will expose the myth and return the world to sanity. Two simple truths will be restored:

  • Robert Heinlein’s TANSTAAFL (“there ain’t no such thing as a free lunch”) will be recognized again.
  • Albert J. Nock’s impolite description of what the Founding Fathers tried to protect against will no longer seem so radical:

Taking the State wherever found, striking into its history at any point, one sees no way to differentiate the activities of its founders, administrators and beneficiaries from those of a professional-criminal class.

The political elite are not our “best and brightest.” They will be slow and reluctant learners. They will resist relinquishing power. The reduction in government will be slow and painful, unless an economic collapse occurs. A collapse is not unlikely and may be the only way to resolve Government Gone Wild.

The name Monty Pelerin is a pseudonym derived from the Mont Pelerin Society founded by Friedrich Hayek after WWII. Monty Pelerin blogs at www.economicnoise.com