Pages

Friday, January 14, 2011

Why Democracies Always Go Bankrupt-A Great Paper By Gonzalo Lira

Why Democracies Will Always Go Bankrupt

When I was growing up, finance was mother’s milk to me, especially as I was a bit of a math geek. But for my formal education, I was trained—rather rigorously, and in spite of my laziness—as a philosopher and a historian. This odd combination is why I have such a jaundiced view of economics: I don’t find economics particularly intimidating, or even particularly challenging—it’s just finance’s snooty but poor (and slightly daft) older cousin. History’s surprisingly ignorant and blinkered accountant. Philosophy and Math’s lightly retarded, Puritanically rigid, and altogether rather embarrassing spawn.

Now, it’s all good and fine for me to rant about how useless economics is—but these aren’t empty complaints on my part: I can point to a single, specific, monumental failing of economics—a failure in the discipline which pretty much proves my point:

The United States is going bankrupt—and economics cannot explain why.

In fact, a surprisingly large number of economists choose to ignore the problem of America’s looming bankruptcy altogether; or claim there is something called a “structural deficit” (a highfalutin way of pretending that it cannot be fixed, and therefore doesn’t need fixing); or else—as is the case of the fools backing Modern Monetary Theory—they make the claim that all deficits are just debts the government owes itself, so therefore the American government cannot go broke, so therefore—and let’s ring out the QED—the fiscal over-indebtedness is actually not a problem because it doesn’t even actually exist!

They really do claim that. And no, they are not high.

Of course, sovereign over-indebtedness does exist, and it is a problem—a terrible, life-or-death problem: As a lot of historians have pointed out, sovereign bankruptcy presages and ushers the collapse of great nations—often violent collapse. And this is something we want to avoid, no? 

Some schools of economic thought recognize that deficits are bad because they lead to bankruptcy, and that therefore fiscal budgets should be balanced so as to avoid them. But they do not explain why this is the case—they have no argument to explain why deficits happen in the first place. That these clever Austrians point to something that has happened before, and therefore infer that it will happen again if similar conditions are met is not an argument—it is an observation, like saying that the sun has risen countless times in the east, so it will likely rise again in the east tomorrow morning.

This is a true observation—but it doesn’t explain why the sun will rise tomorrow in the east. Since the Austrians cannot explain why deficits happen and eventually lead to national bankruptcy, they are simply positing them, much like tenets of a religion. These arguments might appeal more to our experiences in the real world—especially when compared to the a priori drivel of Neo-Keynesians, Monetarists, MMT weenies, and their ilk: Peddlers of arguments as unsound as atonal clamor. But a posteriori arguments based on intuition and “common sense”—gussied up in German though they may be, and attractive though we may find them—are of no help, because they are based on faith, not reason.

If anything has to be taken on faith—if it can’t be analyzed, its premises scrutinized, and the overall argument judged to be sound or unsound—then it’s really no argument at all. 

I have the argument that explains why fiscal deficits happen. Moreover, I can explain why fiscal deficits occur in a democracy in a manner which is different from any other sort of regime. My theory can explain why fiscal debts in a democracy grow once they start, and I can explain why this growth in debt inevitably, inexorably leads to the bankruptcy of the democratic regime. Further, I can prove—by sound and valid argumentation—that the United States is going bankrupt right now because of this process.

It’s an overall concept I’ve designated as the Democratic Bankruptcy Paradox: The paradox by which every democracy eventually goes bankrupt—regardless of the people’s will and intention of keeping it from going bankrupt.

That’s why it’s a paradox: The citizens of a democratic state are supposed to control its destiny. They obviously do not want their nation to suffer bankruptcy—yet in spite of their will and intent, democratic states always go bankrupt. Always.

This post will outline my proof of why this is so.

I will first explain the logic of my Democratic Bankruptcy Paradox theory, and how it is derived from a rather recently articulated problem in philosophy called the discursive dilemma, or sometimes the doctrinal dilemma; an aspect of group agency that has been used primarily in legal theory, but which I’ve realized has some fairly interesting—and radical—applications to macro-economics and public finance in representative democracies.

I will then explain how the discursive dilemma, when applied to macro-economics and fiscal policy in a democratic regime, leads to the Democratic Bankruptcy Paradox. It is here that I will prove two general conclusions:
• One: Democracies always act in a fiscally incoherent manner.
• Two: Democracies always go bankrupt—without exception. 
Finally, I will show how my Democratic Bankruptcy Paradox theory applies to the American case, and explain why the U.S. governments at the local, State and Federal level spend more than they bring in—even as their citizens uniformly oppose this state of affairs.

So, let’s begin:

The discursive dilemma is a recently formulated paradox in philosophy about how a group’s decisions can be contradictory with the aims of the individual members of the group, to the point of incoherence. Phillip Pettit, Franz Dietrichand Christian List have done a lot of work on the issue of group agency, where the discursive dilemma is discussed; see here for a fairly complete reading list.

As with all paradoxes, an example is the easiest way to understand it—so here’s one:

Suppose there are three of us—you, me and Mary—standing around in the kitchen. Suppose that you and I believe that p is true, while Mary is sure down to her very bones that p is most definitely not true.

Mary is just one person—you and I are two. Therefore, a majority of this group believes p is true.

As I said, Mary doesn’t believe for a second that p is true—instead, she argues very convincingly that r is true. For the purposes of this example, p is completely incompatible with r; not contradictory—rather, incompatible: Symbolically, ¬(p ⋏ r).

Since Mary believes r is true, and p and r are incompatible, you therefore fervently argue with Mary about why r is most definitely not true—if r is true, then p cannot be the case. And you believe that p.

But as I listen to Mary, I come to the conclusion that r might well be true. I don’t believe that p and r are both true—because they are incompatible. I simply believe that r might be the case.

Therefore, a majority of this group believes r is true.

Which allows us to arrive at our paradox: A majority of the group believes p is true, a majority believe that r is true—but none of us as individuals believes that both p and r are true, because as I said before, p and r are incompatible.

However, as a democratic group, we believe that p and r are both true—which is incoherent.

This is the discursive dilemma.

Let me make the example more concrete: I said earlier that you, me and Mary were standing around in the kitchen? Suppose, then, that we have a cup of flour in a bowl on the kitchen table: You think we should add yeast and salt in order to make bread—to which I agree. But Mary thinks we should add eggs and sugar, to make a cake—to which I also agree, as that too sounds yummy.

As a group, the majority is in favor of adding salt and yeast to the flour, while another majority is in favor of adding eggs and sugar to the flour. But even though no individual would conceivably be in favor of adding yeast and salt as well as eggs and sugar to the flour, that is what the group as a whole is in favor of: A majority wants to add yeast and salt to the flour, while simultaneously, a majority wants to add eggs and sugar to the flour.

And that’s just a big old mess. That’s an incoherence in the democratic decision-making process.

So how does this apply to macro-economics in a democracy? It shouldn’t come as a surprise:

You, me and Mary are in the middle of campaigning for our democracy’s budget for next year.

I am campaigning for the Balanced Budget Bill, which requires that our budget be balanced—and all three of us, wholeheartedly and without reservations, agree. So the Balanced Budget Bill sails through.

You are campaigning for the Lower Taxes Bill, which you obviously favor, and to which I also wholeheartedly agree. Therefore, the Lower Taxes Bill has a majority—and it too passes.

However, Mary is campaigning for the More Government Services Bill, to which which I also wholeheartedly agree, creating another majority—and it too passes.

You may say to me, “But your position is contradictory!” But I reply, “Certainly not!”

In fact, I did my civic duty: I listened to all the arguments, and I voted for all the bills. I think we should cut taxes—so when it came to a vote, I voted in favor of the Lower Taxes Bill, which passed. But I also want more government services—so when it came to a vote, I voted in favor of Mary’s More Government Service Bill, which also passed.

And all the while, I’m still in favor of my law, the Balanced Budget Bill, for which I voted. 

Thus, as a group, we have an incoherent outcome: The majority of the group believes taxes should be cut—and at the same time, the majority of the group thinks the government should deliver more services to the people. All of the members of the group individually do not want a deficit, but as a group their incoherence leads to a deficit.

This is the democratic fiscal incoherence, a situation unique to democracies.

All democratic regimes eventually reach a state of fiscal incoherence—in fact they reach this state every year, at budget time: A majority of the people want lower taxes while at the same time, a majority of the people want more government services. That is because all people want to pay less and receive more, a self-evident proposition.

A democratic regime has to resolve its fiscal incoherence every time it happens—that is, every year a new budget is proposed. If it doesn’t, it will not be able to operate the following year, as it will not have the money to do so. (This of course is assuming an independent Central Bank that will not money-print away the dilemma.)

If the democracy’s government can only spend such revenue as it actually receives (and there is no Central Bank funkiness), then the electorate will be forced to come to grips with the incoherence of its decisions in the chambers of its parliament or congress: The democratic representatives of the electorate, be they MP’s or Congressmesn, will slug it out—proponents of cutting taxes fighting proponents of more government services—until eventually, a service is cut or a tax is raised, so that the budget is fully covered: This way, the democratic fiscal incoherence is solved, year after year. 

The only way a democratic regime can avoid having to resolve its fiscal incoherence is by issuing debt.

Some democratic regimes do not have the credit-worthiness to issue unsecured debt—so issuing debt is simply not a possibility. In fact, all democracies at least initially are constrained from issuing debt because of their circumstances. They are forced to resolve their annual fiscal incoherence—either government spending will be lowered, or taxes raised, but it will be thrashed out and resolved one way or another. No one will lend them the money—so they have no choice.

However, as each successive, successful resolution of the democratic fiscal incoherence takes place, paradoxically, the democratic regime becomes more credit-worthy: The cost of borrowing goes down with each successive, successful resolution of the democracy’s fiscal incoherence.

When it finally reaches the point where credit is so cheap, and the cost of resolving the annual fiscal incoherence—politically, emotionally, practically—is higher than the cost of taking on debt, then a subtle crisis point will arise: The democratic regime will “postpone” the resolution of its fiscal incoherence, and instead take on debt.

This is the tipping point: This is the first step on the path to ruin for a democracy. It’s a subtle moment, but it’s key—the moment when the democracy decides not to resolve its fiscal incoherence, and instead paper over the incoherence by way of debt.

All democracies reach this point. The United States reached it in 1975, when it failed to balance its budget for the first time in peacetime, and never balanced it again.

Once the democratic regime fails to resolve its fiscal incoherence one year and instead covers the shortfall with debt, the democracy enters a debt spiral: The cost of resolving the fiscal incoherence of the electorate is double what it was last year (last year’s cost plus this year’s cost), while the cost of borrowing in order to paper over the fiscal incoherence has likely remained the same, or risen only slight. Therefore, the cost of borrowing the second year is half what it was the first year. And the third year? Assuming the costs of debt haven’t risen significantly, the debt is cheaper still on the third year, when compared to the costs of the accumulating, unresolved fiscal incoherence of the previous years.

This is how every year, the costs of additional debt falls in relation to the cost of resolving the accumulated fiscal incoherence. And this is how it will continue in a democracy, as its debt spirals.

So long as the cost of issuing debt remains lower than the political, financial, personal, social, and emotional costs of resolving the democratic fiscal incoherence, then the deficit will continue (or expand), and the total fiscal debt will grow—because each of the majorities will want more of what it got with each passing year.

This is the problem of unresolved fiscal incoherence: Each majority in a democratic regime becomes accustomed to getting its way, and not reaching a compromise or accomodation with the other majorities that would be necessary, were the fiscal incoherence of the democratic process forced to be resolved.

Thus, the majority which wanted lower taxes expects and demands even lower taxes the next year—while the majority which wanted more government services expects and demands more government services the next year too.

Thus does the debt spiral accelerate. An although no one wants more fiscal debt, the failure or unwillingness to resolve the fiscal incoherence—and the ease of issuing unsecured debt—makes the elimination of fiscal debt in a democracy impossible.

This is exactly the situation happening in the United States today—and it is a natural, inevitable byproduct of not resolving the democratic fiscal incoherence.

In the U.S., majorities wanting lower taxes and more defense spending get their way, while at the same time majorities wanting more government services and entitlements and goverment macro-economic stimulus get their way too—all happening while the overwhelming majority of the population is fervently opposed to deficit spending, which is geometrically adding to the fiscal debt. 

This is my Democratic Bankruptcy Paradox theory in action, as applied to macro-economics and fiscal finances in the United States: The democratic state incurs a deficit and fiscal debt which the overwhelming majority of the population do not want—yet are powerless to stop. 

(Some might claim that the discursive dilemma as it relates to macro-economics only happens in a democratic state where all of the citizens have an equal vote. This line of argument might conclude that if there was a smaller group of people with decision-making powers, there wouldn’t be this incoherence. The counterargument is, If there were some voters whose vote somehow counted for more, then the Democratic Bankruptcy Paradox would occur again, only this time in this smaller group, with all the same effects; call it the Oligarchic Bankruptcy Paradox. We can regress to smaller and smaller groups—from oligarchy, to technocracy, to committee, to triumvirate—but the Bankruptcy Paradox will always happen, unless there is a single man who decides the issue of fiscal policy—and that man’s name is Dictator.)

As the debt burden in a democracy grows because of the failure to resolve the fiscal incoherence, the total debt inevitably reaches a point where it is unsustainable. People can argue the exact point where fiscal debt becomes unsustainable—100% of GDP, 120% of GDP, or some other figure. But that issue is irrelevant for this discussion—all we have to agree on here is that such a point of over-indebtedness eventually, inevitably happens. I doubt anyone will find this presumption controversial or debatable.

Therefore, once a democracy’s debt reaches a point of unsustainability—either because it cannot borrow more, or it cannot service the debt it already has—the democracy becomes bankrupt.

So as you can see, this always happens, in every democracy: Failure to resolve the yearly fiscal incoherence of the democracy leads it to take on sovereign debt, which leads to a debt spiral, which leads to bankruptcy—every time.

There are several well known outcomes to a nation’s going bankrupt—none of them pleasant, some of them quite awful. Again, a presumption that should not be controversial or debatable: Most of the outcomes of a national bankruptcy are worse than the sacrifices made to avoid bankruptcy. Therefore, national bankrutpcy should be avoided

Now, the solution to this problem—how to avoid national bankruptcy—is quite obvious: Avoid taking on sovereign debt in the first place.

But the problem, as pointed out earlier, is that debt becomes cheaper as a democracy becomes more successful at resolving its fiscal incoherence. In every successful democracy, the point where the cost of taking on debt is less than the cost of resolving its fiscal incoherence will always arrive—it is inescapable. And when that point is reached, people will rationally decide that taking on sovereign debt and kicking the can down the road is a better choice than resolving the fiscal incoherence of the electorate.

This is why democracies will always, in the end, go bankrupt.

This is why the United States is going bankrupt now.

The United States was generally very successful in resolving its fiscal incoherence since the Revolution of 1776 until 1975. Debt was taken on—but only in exceptional cases, almost always war. See the following chart.


As can be readily seen, the periods of large debt occurred during and after the Revolution, the War of 1812, the Civil War, the First World War, the Great Depression, the Second World War.

But then since 1975, the U.S. fiscal debt grew steadily, paused for a bit in the Nineties (when because of political happenstance the contrary aims of the executive and the legislature led to debt reduction)—but then shot the moon. The Congressional Budget Office projects 10% of GDP deficits are in the offing until at least 2013, perhaps until 2016.

My bet is, the 10% of GDP deficits will be even larger in the coming years. And they will not stop in 2013 or 2016—the only thing which will stop the ever-increasing deficits is national bankruptcy. The American democracy cannot prevent this bankruptcy. Bankruptcy is the inevitable, inexorable end.

I hope I have proven why.

77 comments:


nobull said...
GL - makes sense, but I must say that you are overcomplicating a very simple issue. Everyone understands that human nature is to want to pay less tax yet receive more services. The end result will not likely be "bankruptcy" per se, but a significant devaluing of the currency once a basket of international currencies replaces the USD as the reserve.
Gonzalo Lira said...
Thanks, nobull, but read it again: This is the most important essay I have ever written—this is a major proof.  What you are referring to is inference and experience—but my proof is philosophically valid and sound.  Mull it over and think about it, and you'll see its full implications.  GL
nobull said...
I don't argue the validity and soundness of your proof. I just thought it was fairly self-evident that human nature and democracies don't lead to good behavior. I also think that a good part of the problem is that those making the decisions (i.e. Congress, Fed, Treasury) all have incentives to push the problem forward, while Congresspeople are generally too stupid to even understand what the hell the problem is. Exhibit A: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aO10ieKo5lX8&refer=news One other thing you could do to bolster your (obviously true) thesis is to provide some examples of other democracies that have failed. Contrarians to your viewpoint would likely point out that the US is not a democracy but a republic...
Anonymous said...
If the gov't doesn't have deficits, how does the monetary base ever increase?
Anonymous said...
yes above post is right. for someone to has deficits someone else must have surpluses.
Anonymous said...
GL: It's an interesting argument but I really think you should read Mancur Olson's Rise and Decline of Nation, which to me is much more convincing. (short synopsis: collective action, i.e. government, always comes with asymmetry. In other words, the steel industry gets 100% of the benefits of a steel tariff, while each citizen only pays 1/N of the cost. So special interest group X has a strong incentive to lobby for legislation that benefits them, potentially even at a cost to the whole, while the rest of the group has only a mild incentive to fight them. So basically politics will always fail to special interest groups until a war/national collapse, when the slate is wiped clean and the cycle begins again).
D. Mark Loyd said...
AND because the US is a republic, and because of groups such as the Tea Party which currently maintains as it's primary issue debt reduction thru smaller govt and reduced govt spending and balanced budgets, debts may be reduced should the party hold to its' mantra and continue to vote out any rep that strays. Pretty simple concept. As an entrepreneur and small biz guy, when my revenues drop, or hopefully once i beleive they "may" decrease and before they actually do resulting in possible incurance of debt in the first place, I will cut expenses to a level below my anticipated revenues. THAT is what is lacking in DC - fiscal discipline and the intellectual honesty to know, understand and PRACTICE BASIC DOUBLE-ENTRY ACCOUNTING. More often than not basic biz intellect / experience is simply lacking in our DC reps. Maybe the answer is to get rid of the community organizers and lawyers in DC and replace them with small biz guys! My Two Cents Worth..... http://dmarkloyd.blogspot.com/
Anonymous said...
@D Mark Loyd When the 17th amendment passed the U.S slipped farther down the slope from republic toward unstable democracy.  @ anon I don't think the thesis here is incompatible with the failure mode in "Rise and Decline of Nation" It looks very similar in basic construct.
Chris Ferrell said...
Gonzalo, Your proof as to how we get into the mess is perfectly logical. But it seems to me that when bankruptcy looms menacingly around the corner, that not balancing the budget must appear more costly than making the sacrifices and balancing the budget, even at the level of the herd.  At some point, won't enough enough of the herd realize that bankruptcy will cost each of them individually much more than the higher taxes they must pay or lower government services that they must accept? We hear a large and growing number of Americans that have realized that it will cost them each more if the country goes bankrupt than it would to end the pointless wars, shut foreign bases, cut back on govt. services, raise taxes and postpone entitlement programs until people reach 67. If enough of the herd comes to this conclusion, how does your  Democratic Bankruptcy Paradox explain why the death spiral cannot be stopped. I read it twice and understand perfectly how you explain the process that gets us to where we are. I don't understand how your paradox explains why its impossible to stop before arriving at the abyss. I think that we won't stop before the abyss, but that is conjecture. Can you prove that its true?
Anarcissie said...
No doubt democracies come up with inconsistent and incoherent answers to questions of policy. However, it is a considerable reach to describe the United States as a democracy. We do not, all 310 million of us, sit around deciding on the Federal, state and municipal budgets. The people who do the deciding are typically involved in power-holding organizations where they are not equal, but are hierarchically organized, often under the leadership of a very few people. Such a social order can easily produce consistent and coherent policies, including fiscal policies. The source of the present catastrophe (of which we are observing the opening stages) must be sought elsewhere.
Gonzalo Lira said...
To Chris Ferrell, Thank you for being so diligent.  You have a good point—but you're forgetting that the unresolved fiscal incoherence buids up: It is not a steady thing, but adds on with each year that it is unresolved. With each year, there is less incentive for each majority to give in, as years of unresolved fiscal incoherences builds up like plaque in the system.  Everybody expects to get their way—so they insist on getting their way: So nobody compromises (as happens when fiscal incoherence is resolved).  35 years of unresolved fiscal incoherence? It's too late for the U.S. Does this explain the process?  I'll be closely monitoring this discussion, and will answer relevant, pertinent questions, like Mr. Ferrell's.  GL
Anonymous said...
http://en.wikipedia.org/wiki/Republic_of_Venice
Anonymous said...
This happens not just under democracies. It also happens under tyrannies. Look at the Military Anarchy of Rome following currency devaluation after they year of five emperors. Individuals themselves when faced with the realities of economics can hold mutually exclusive ideas to avoid some of the unpleasantness of reality.
Gonzalo Lira said...
Anonymous at 7:29pm, 1/13/11: You've missed the point—I'm specifically talking about democracies, and the fiscal-finance decision-making process among the electorate. I'm not talking about other forms of governance—just democracies.  Think it over some, then get back to me.  GL
Jack said...
The overall argument is interesting and strikes me as sound. However, I must be missing something in the "kitchen" example. First you say:  "You think we should add yeast and salt in order to make bread—to which I agree. But Mary thinks we should add eggs and sugar, to make a cake—to which I also agree, as that too sounds yummy."  Then you say: " . . . even though no individual would conceivably be in favor of adding yeast and salt as well as eggs and sugar to the flour . . . "  But wait a minute -- you just said you did "agree" to both -- how is that different from being "in favor of" adding both? Either I'm completely missing something here, or this example needs some more work.  It seems to me that what is really going on is that many players do simultaneously favor mutually inconsistent policies, in part because many government policies are deliberately engineered to be so complicated that it's impossible to tell which measures are consistent with one's values, and also because measures that one approves of are typically bundled with others that one doesn't approve of, but you don't get to vote on them separately. Jack
B said...
You can also look at it this way: every election has an electorate of two parts. There are those who are going to vote for a specific party no matter what, and those who are on the fence. The way to win the nomination in a district GUARANTEED to vote for a specific party (say, San Francisco) is to promise favors to various party string-pullers, who will in turn pass the kickbacks down to their vote banks. The way to win the nomination in a district that is up for grabs is to bribe those who are on the fence. Either way, any other course of action is maladaptive and will result in defeat; either way, he who wins must do so by corrupting the electorate. Just like in ancient Athens, the resources to do so must either come from foreign conquest and tribute, or internal redistribution of wealth. In the first case, there are going to be diminishing returns, since the FUTURE tribute from tributaries will be used to finance today's bribery through various derivative schemes; in the second case, the returns will diminish even faster as the producers leave or turn into consumers. Note that this all applies not just to democracy but to any kind of popular government.
hugh said...
so the founding fathers screwed up by not saying "no debt" in the constitution.  if they had included that phrase we'd be golden? seems to me you could develop a theory that says empires change the rules as needed to ensure more empire so constitutions will always be shreaded. once shreaded debt can be deployed...  seems like someone once said "power corrupts" so is that what it boils down to?
Vincent Cate said...
Gonzalo is right that MMT people are fools. However, I think MMT is interesting enough that anyone not familiar with it should spend a few minutes learning about it: http://pair.offshore.ai/38yearcycle/#chartalism None of the MMT people understand hyperinflation. So I have written up hyperinflation in MMT terms: http://pair.offshore.ai/38yearcycle/#mmthyperinflation
Anonymous said...
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years. ~Unknown
Vincent Cate said...
I think the US Federal government could fall while the states carried on. Sort of like the USSR just vanishing.
Anonymous said...
From the Oxford English Dictionary.  Origin of the word "Democracy" late 16th century: from French démocratie, via late Latin from Greek dÄ“mokratia, from dÄ“mos 'the people' + -kratia 'power, rule'. My guess is that if the people really had the power, the way our money is spent would be different. The US went from creditor to debtor nation because of the Vietnam War. I'm pretty sure the Majority of the people were against the war. (I assume democracy to mean control of an organization or group by the majority of its members) It was an undemocratic process that kept the war going. The rising cost of the war led foreign central banks to redeem their dollars for gold. This eventually led Nixon to close the gold window. I think if the war ended sooner when the majority was against it the US MAY NOT have gone into debtor status or closed the gold window. So I respectfully disagree with your analysis.
Andy Shand said...
GL  This is not only occurring in a fiscal sense.  The judiciary is also susceptible to "Discursive Dilemma”  Read Kornhauser and Sager (Kornhauser, 1992; 1986; 1993 Therefore, not only are we fiscally screwed, but legally we have huge problems. Groups in public life cannot attain to speaking with one voice, or act with one mind. Lacking is integrity; it is the legislature that lacks the integrity, not the voter.  The truth is that policy makers in the USA will never achieve the simple challenge of “The many acting as one.
Anonymous said...
1. i thought the budget was balanced for 1 or 2 years in 2000-2001 2. cost of debt driven my short rates and credit expansion 3. if people are voted in based on elected promises, then that usually implies giving the people more and more (bribery for power) until the well runs dry. 4. nice theory, but guido wrote about this like over 2 years ago- http://guidoromero.wordpress.com/aims-and-rationale-of-this-blog/ 5. maybe the constitution should have said no un-collateralized debt should be issued ... the impact on default being the confiscation od state resources. 6. the MMT crowd agreed is mad  7. this ain't no rocket science, just common sense
Anonymous said...
I agree with your article, but disagree with your thesis that ALL democracies will go bankrupt. I live in Sweden, and we had a crisis about 1990 and a few years forward. Then all political parties came together and decided that we must have a balanced budget and a fiscal ceiling every year. And then our democracie made tuff haircuts and got the fiscal situation in order. And now we are running a balanced budget, and Swedens fiscal balance is the best in EU besides Luxembourg.  For example we have had cuts in public pension benefits from 2009 three years in a row, without riots in the streets, although our fiscal balance was much better than in other european nations. So, i do not agree with you that ALL democracies will fail and go bankrupt. KH Sweden
Anonymous said...
8. i thought the world was at war with "terrorism"  rgs plops
brunolem said...
I agree with Anonymous 8.48 PM right above, and a few others. The problem is not democracy, but corrupted democracy! And it is not only the politicians who are corrupted, but the whole supposedly democratic system. In the US especially, the electoral process has become a big TV show and the winners, Obama is a prime example, are in the same category as those of American Idol. It is not the concept, whether it is democracy or republic, or even dictatorship, that lead to bankruptcy, it its corruption. Now, it seems to me that humans have not reached the level of wisdom required to successfully implement democracy. They can't help acting as adolescents, who want to drive daddy's car without having a licence, and after smoking a joint with some friends.  Of course, the adventure is doomed to end in disaster. Click on my name to visit my blog.
Rick Sanchez said...
Gonzalo, outstanding analysis!  Pinochet saved Chile in 1973, who will save us from the road to disaster?
Anonymous said...
Vincent Cate said...  http://pair.offshore.ai/38yearcycle/#chartalism thanks for the link and contents! but as i mentioned here before i do believe there is a limits to money printing and that is the impact on the price of oil. rgds plops
Bruce Krasting said...
GL,  So if it is inevitable the only question is when. Sooner versus later? I suspect this may drag on for a good bit longer.  What limits are there to US indebtedness? None? At least so far that is the answer. Treasury issues debt, the Fed buys it. A convenient solution. It will take something very dramatic to change this. What will it be? Something that we are not focusing on today, is the answer. Oh, but that I knew.
sadfghjkl said...
Excellent analysis Gonzalo and I fear we have to wait but a year or two for your truth to become self-evident, requiring no further argument of the point ( but PLENTY of finger and gun pointing! ) Cheers --Martin
Ramon said...
Wouldn't representative democracy (sans checks and balances) only accelerate the trend? While I accede the argument is pertaining to democracies, it would seem that it could be extrapolated to an argument against inception of any government. Any form of government must effectively be accepted by the majority through some measure of approval in the form of complicity or submission.
Anonymous said...
It's all about global consciousness these days. America's dollar will hold until the global consciousness says, "No, you're not as powerful as we thought you were." Now the problem is that we have convinced the world that The Bomb we have in enormous numbers is all powerful...which it is not.  When people realize that our bombs aren't really that bad, then we will fall and our control over the world's economy will end.  And honestly, there is nothing to worry about. Jesus explains that perfectly well. But what happens after global consciousness shifts is the question.
Gold4Life said...
GL, loved your essay, but it can be boiled down even more succinctly: Alexander Fraser Tytler (1747–1813) "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship."
Anonymous said...
@Anon (boy is this amusing) I think they are similar but subtly different. Olson's point deals with how we develop our preferences in large organizations. GL's point is that even given reasonable individual preferences, the government as a whole will have trouble reflecting them (in the cake/bread example, our protagonist may want both cake and bread, but he will probably prefer one or the other). In fact as I write this I am reminded of Arrow's impossibility theorem.
Anonymous said...
This is not a proof. It is a theory. The future is not written yet. Even if you believe that every democracy in the past has gone bankrupt and even if you have a good theory for why that happens, that does not mean that every future democracy will follow the same path.
Anonymous said...
Economist and legal scholar David D.Friedman has researched the topic of 'the economics of politics'. Perhaps that ties into this brilliant discussion, as well. *author of the Machinery of Freedom, Hidden Order, Price Theory and other books, also blogs at (daviddfriedman.blogspot.com)
KrisofRose said...
it makes sense, thanks.
Anonymous said...
What about Hyman Minsky? His work can explain why the US is going bankrupt.
Anonymous said...
I would vote for lower taxes and a balanced budget, but wouldn't vote for more government services in a million years. Am I alone in this thinking? Or does altruism have no place in a universe of total self-interest? For some stupid reason I've always thought that the Founding Fathers were under the impression that adults would be somehow involved with making the decisions necessary to govern this country, and not selfish school children unable to put the good of the people in front of their own wants and desires. Because it seems to me that any individuals who could gather together the slightest bit of backbone would crash your very carefully constructed "proof". Of course the sad thing is that you are probably right, but still a guy has to hope... JTS
Cesar Sp said...
Gonzo, I understand what you are saying and this some of the best stuff I have ever read, too bad our leaders are too scared to do anything about it..
Tynan said...
Interesting idea. I'm not sure it really has any useful predictive power. First I address the focus on democracies. This seems to be a criticism of democratic systems. I rebut by asking you to consider how often dictatorships have gone bankrupt versus how often democracies have gone bankrupt IRL. I haven't done a survey, but my intuitive sense is that democracies have a much better record in this regard. So this argument fails as a specific attack on the democratic system, at least in a practical sense. The second problem is the near-unfalsifiability of the statement, "All democracies will go bankrupt" and thus its lack of predictive power. If we consider the fact that the end of a nation usually correlates with bankruptcy, this is a little like saying, "All nations will end." Sure - the heat death of the universe guarantees this, but it doesn't tell us anything useful. I need to know when they will end, how, and how to stop it. The US has been around hundreds of years and remains financially healthier than a much younger Greek democracy. If this trend were as simple as you say there would be a consistent life cycle of democracies. There is not. See also cases of coming back from the brink, as Sweden was talked about by a commenter above. In real life, the life cycle of a modern democracy is a mystery to all, born of interactions between countless different trends and causes, many of which are not named or recognized by anyone. You've found an interesting trend in the nature of special interest politics, but this really isn't much different from the old idea that small special interest groups will usually win over the mildly-interested majority. It doesn't guarantee the death of democracies, it just creates a systemic tendency towards deficit. Other side effects vary according to hundreds of factors, and may (Greece) or may not (Sweden) include bankruptcy.
JimDesu said...
Sadly, this could be avoided with a constitution-bound/enforced budget process that forces sanity (1: only the preceeding year's revenues may be spent, 2: the allocation of revenue by percentage occurs before funding decisions, 3: funding decisions per "pie-slice" may not exceed the percentage allocated) -- by a purely subtractive process. Too bad we don't have such a thing....
Anonymous said...
I have a much simpler theory. We are all taught and most assume that democracy is inherently good. But once corruption reaches a critical mass and there is money to be made in the indebtedness of others, it will happen. The corruption hides in the democracy. But the democracy is good. It is now impossible to challenge the corruption without discrediting democracy. On a smaller scale, a corrupt town sherrif and judge are hard to remove because they control the political stage. A rally for honest government is ruled to be "disturbing the peace" and the corrupt sherrif enforces the corrupt ruling. If a king was to take half your money you woulf know who to blame. But when an elected body takes half your money, they can maintain it is "the will of the people". Unfortunately, the constitution does not protect us from corrupt and arbitrary government. We have failed to protect our constitution.
When Trust Matters said...
GL Dude, Don't forget to enjoy your life. Friends, family deserve your time and talents more than we do. Nice to hear what you think, but relax cause no amount of ruminating will change the outcome.  namaste, the saint
K Smith said...
GL, Bankruptcy is not inevitable. If my prayers are answered and cold fusion is perfected, energy costs plummet, our economy switches on the afterburner, and we dodge a huge bullet. I can dream, can't I? KS
Anonymous said...
Andrew Jackson had wished that the Federal Government did not have the power to borrow. Apparently, he was onto something.
Jim said...
Gonzalo - Really nice bit of work. I figured out a while ago that there is a basic incompatibility in the areas where capitalism and democracy overlap (think Venn Diagram). I just thought elected officials would always want to give everything to everyone to get re-elected ...which is true ...but not nearly as well defined as your argument. Brilliant stuff ..thanks!
Anonymous said...
I commented above about Swedens ordeal in the 1990-ies. I believe that the right wording in your article might be MOST DEMOCRACIES GO BANKRUPT, not ALL.  There are huge differencies between different democratic countries which are important. Take the difference between Greece and Sweden. Greece is a corrupt country, and it WILL fail, and Sweden is one of the least corrupt countries in the world, and it could make it without failure(perhaps). There are other differencies between countries that matters. How old is the country, has it a long history of stable governement, traditions an so on. If i would name countries less likely to fail, it would be Finland and the scandinavian countries. KH Sweden
Mike Scully said...
Hi GL. As always, I enjoyed the post and learned a lot. Democracy is a broad term. I would agree that the type of democracy the U.S. has become fits your proof because we ignore our own constitution. Your proof can be applied to all current democracies (without knowing the details of all current democracies I'm only assuming). However, It is possible to envision a constitutional republic that would avoid this paradox as JimDesu 12:16 pointed out. I would add that it would require a gold standard or some other non-debt-based form of currency. Your premise below can be avoided  "When it finally reaches the point where credit is so cheap, and the cost of resolving the annual fiscal incoherence—politically, emotionally, practically—is higher than the cost of taking on debt, then a subtle crisis point will arise: The democratic regime will “postpone” the resolution of its fiscal incoherence, and instead take on debt." Politically, emotionally, practically wouldn't matter if the Constitution explicitly prevented borrowing by law as JimDesu suggests. War funding would be handled by pulling from an emergency fund, diverting funds from other areas of the government, temporarily raising taxes, or issuing debt with assets, such as government land, as collateral.  But for today, from a practical standpoint, you're right. This is why all democracies go bankrupt.  Also, I don't fully accept the discursive dilemma as you presented it; but that's a separate discussion.
Ruben said...
To all who say things like "the US isn't a democracy!", "it may happen in your democracy, but not mine!": that is besides the point. In any system where more than one person wields power this tenet will hold true. The only exception would be a group of decision makers that will, ad perpetuum, all have exactly the same goals -- which is rather unrealistic. To the poster mentioning Sweden: yes they did a wonderful job. But all they did was postpone the inevitable. Swedish politicians do not live in a vacuum. Current events dictate how people vote. Are you 100% certain that the next government will act the same way? And the one after that? And after that one? To prove that Gonzalo's statement is wrong based on the example of Sweden, you would have to be willing to assert that for all eternity, the majority of Swedish politicians will act the same way. In a country having problems with immigration, demographic upheavals and being connected to the EU (though not actually part of the eurozone), asserting an inalterable mindset is unrealistic. Just like it is for any other country.
Anonymous said...
I am reading your article and completely agree. Funny enough, I was explaining something similar to a friend over Christmas, yet not as well, I must admit. So, you have explained very clearly the point I was trying to male. I want to add one thing. As the paradox exacerbates itself in the form of growing deficits, you will have educated people that will construct theories justifying the possibility of persevering in the path of fiscal unsustainability. That will remove even further the wish... desire... will to resolve the fiscal incoherence and thereby expanding the volume of debt. Georges B.
Vincent Cate said...
What about Switzerland? Have they ever defaulted or gone bankrupt in the last 700 years? This seems like one of the best designed governments.  http://pair.offshore.ai/38yearcycle/#limitedgov
Gonzalo Lira said...
About Minsky and the Austrians: They have observed that debt leads to bankruptcy, just as ancients observed that the sun rose and set every day—but they have not explained the why and how of their observation. They may have been shrewd, and many people may agree with them because what they say conforms to experience—but they did not prove anything, nor explained why it is always the case.  I have. This post is a proof, not an observation.  About how other forms of government go bankrupt or not: I am writing about representative democracies, not other forms of government.  About a constitutional amendement to balance the budget: The issue is the cost comparison between resolving the fiscal incoherence, and the cost (or availability) of debt. If the cost of acquiring debt is substantially cheaper that the cost (political, social, practical, personal) of resolving the fiscal incoherence plus the cost of breaking the balanced budget amendment, then debt will be taken on, even if that means breaking the balanced-budget amendment.  Furthermore: When a democracy goes bankrupt, it does not necessarily end. I am not arguing that. I am saying that in a democracy, bankruptcy always happens eventually. Whether the democracy survives after bankruptcy is up to the citizens of that country.  GL
Gonzalo Lira said...
Additionally: There are two famous quotes about democracy and money:  Tytler's quote (mentioned twice above): "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship." Marx's quote: "Democracy is a form of government that cannot long survive, for as soon as the people learn that they have a voice in the fiscal policies of the government, they will move to vote for themselves all the money in the treasury, and bankrupt the nation." I must insist: These are shrewd observations—they are not proofs.  Imagine I said: "The sun rises from the east and sets in the west." That's an accurate observation—but it doesn't prove or explain anything.  But if I were to say, "The sun appears to rise and set, but what's happening is, the earth is spinning on its axis, and so because of our relatively static position on the earth's surface, the sun relative to us appears to rise and set." This would be an explanation that can be tested, analyzed, proven or disproven.  A shrewd observation or guess cannot.  That's why this post I've written matters.  GL
Holger said...
Hi Gonzalo Why making things more complicated than necessary? The inevitableness of bankruptcies of nations is no specific characteristic of democracies but of the creation of money out of thin air - independently of who creates out of thin air. In most of today's world this is be done by central and private banks (fractional banking). And as today's money is ALWAYS (and not only through QE measures) produced as debt (see a dollar note, there it is written on) its repayment has to be made plus interests. And here is the point: The interests on all debt cannot be repaid as they were not created in this creation out of thin air. Those can only be repaid through additional debt, again created out of thin air. You see the spiral? And as the curve of interests and compound interests is exponential (compare the debt curve of all states) we will always see a collapse in the end. So, no characteristic of form of governments but a logical result of the creation of money in form of debt out of thin air. Explaining how it works in a democratic environment abstracts from the core point. By the way: Do you evaluate the US as a real democratic form of government? Holger
Tancred said...
"All democratic regimes eventually reach a state of fiscal incoherence." More generally, all regimes eventually go broke owing to fiscal incoherence. History does not appear to support a thesis that this fate is unique to democracies. History does support a thesis that state power to debase the value of money eventually and inevitably proceeds to bankruptcy. If the value of money is enduring, whatever fiscal incoherence may arise as a temptation to deciders isn't ultimately executable. It is therefore only a failure of the regime in power to preserve value of money which enables the operation of decisions leading to bankruptcy.
sumo said...
Gonzalo, I like your argument. Your conclusion, that fiscal incoherence increases with time and never decreases, has an interesting thermodynamic flavor. But please address the counterexample of Sweden, and the way it handled its economic crisis in the 1990s with an increase of fiscal responsibility (coherence).
EDP said...
So you solved the question of why deficits happen: Power-hungry/work-shy politicians, wanting to be everything to everybody, go in hock to buy votes then kick their fiscally irresponsible actions down the road. Whew! That was hard.
Neil said...
This country is a republic in theory only. We are a democracy in reality. Nobody, except for maybe Ron Paul, in our Federal Governement even thinks about whether or not the legislation they are proposing or voting on is constitutional, i.e. lawful. And that's what a republic is: rule by law. Once you start passing unconstitutional legislation, you have become a democracy. It has become so bad, that I have discouraged my children from believing that the constitution is significant in any way at all. Could you imagine if they grew up believing that the constitution was actually in effect in the U.S.? They might decide to carry a pistol while taking a trip to the grocery store, mistakenly thinking that the 2nd amendment still applies to them. Then I would feel responsible and guilty that they were charged with a felony for illegal posession of a firearm. Yep, the constitution is just a piece of paper from history, nothing more.
Anonymous said...
It seems that Jack (comments) is the only one that pointed out that the proof makes no sense. -There can only be one majority.
Anonymous said...
GL U talk of a dictater but it could also be a king. A recent visit to Tonga helped me understand better the value of a royal family. Emphasis on the word family. Lot of powerful forces operate in familys and as we all know they are not perfect (just like govermnents).But for a family to succeed u have to bring things like love and respect along. They can set the tone and the example for a society to thrive. I sure dont feel loved by my PrimeMinister. Reviled maybe. Inheritance is another aspect of it. and we all stand on the shoulders of those who came before. and we should revel in this and make use of this experience and not apologise for it. In oz we still have a queen albeit a figurehead. But perhaps the US can apologise to the good queen and explain that the war of independance was all a big mistake. Haha. asterik
Anonymous said...
I too like your 'thermodynamic' approach to the dilemma but would suggest we need a grand unifying theory to explain, not just democratic economic disintegration, but ALL human economic systems. National Entropy as it were. One could, e.g., posit that regional, ethnic and class centripetal forces develop overtime and that deficit spending is necessary to overcome these forces in order to hold the state together. Alternatively, some have suggested that, overtime, the bureaucratic imperative or increasing system complexity cause the public sector to consume an ever greater amount of national resources until it is no longer economically viable for the nation to exist. Anyway too complex for me to figure out but the empirical evidence does suggest ALL nations or empires eventually go bankrupt not just democratic ones.  Scott
Benedict@Large said...
In a word, amateurish.  I could not tell from your article what exactly your understanding of MMT is, nor what your economic orientation is, but fortunately, your comment links provided these answers. On the later, you obviously prefer a commodity-pegged currency, and your preference of commodities appears to be gold. I find gold bugs to be amusing. There is an assumption necessary among them that their small numbers have some special insight into economics that the hundreds of thousands of formally-trained economists who are not gold bugs have just totally missed. The hubris of this is astonishing. The reason gold was dropped as a peg was not, as you say, because anyone was bankrupt. No, the reason gold was dropped was because it didn't work. Under gold or any other commodity peg, the underlying economy will eventually start acting more like that commodity and less like the economy it is. If this continues, the underlying economy will collapse, NOT from a lack of productive capacity, but rather because that productive capacity is being severely constrained by a mining problem. As for your knowledge of MMT, if you paid to obtain it, you should ask for a refund. Your explanation is littered with misstatements, exaggerations, and omissions. I would detail them out for you, except that I'm certain you would not be inclined to listen to a "weenie". You can be consoled however by the fact that many of yours are COMMON misstatements, exaggerations, and omissions. And then there is your hyperinflation. Hyperinflation is more than just inflation with big numbers. In order for inflation to be hyperinflation, it must be both persistent AND exogenously-driven. If it is instead endogenously-driven, it is merely inflation, and a new equilibrium will eventually be achieved without outside intervention. In your choice of cases, the Weimar Republic, chartalism would have had little traction, as Germany's problem was that its debt was not denominated in its own currency (i.e., it was exogenous), a situation that chartalism (now MMT) stresses as extremely dangerous. The Weimer failure thus was not caused by MMT. It would have occurred regardless of the brand of economics chosen, and even a gold peg would not have mattered. More recently, Zimbabwe, Brazil (and other Latin), and Iceland failed for the same reason, and MMT was not being used by any of them. In the recent cases of Greece and Ireland (and possibly Portugal, Spain, and others), the failures are due to their choice of an exogenous currency (the Euro) over a sovereign fiat, and are failures that were anticipated by many non-MMT economists (and ALL MMT economists) upon the Euro's inception. The Euro's design, while allowing for garden-variety recessions, precluded any adequate response to a severe financial shock such as we have just experienced. These failures (and those pending) could have been EASILY avoided using MMT. It's not rocket science, but one does in fact have to KNOW it to employ it, and not merely to have been exposed to cherry-picked misrepresentations of it. Otherwise, I enjoyed your article. You clearly put a lot of effort into it, and that is always to be admired. Benedict@Large http://www.facebook.com/benedict.at.large
David said...
Godzalo is very wordy. To summarize: Democracies always go bankrupt because eventually enough of its citizens learn to vote for too many somethings from nothings.
Anonymous said...
GL  Great presentation.  Two problems in America today:  1) Absolute power corrupts absolutely. The collective government in the United States feels itself in a position of absolute authority and creates rules unilaterally, based on their own clouded interpretations.  2) The people have grown apathetic. A sure sign of this is the spoken use of 'Whatever'. Far too many people have no desire to examine the policy making of the government allowing others to think for them. They have abdicated their responsibilities.  hh
Arthor Bearing said...
I skipped the rest of the article after the first few paragraphs because it's obvious that democracy tends towards impossible socialism, goes into debt, and never votes to pay down the debt by cutting services, so it eventually collapses. Once you give people the right to vote, they will eventually realize that they can vote themselves money. After that it's all inevitability, except to the extent that somebody with real leadership comes along and pressures people into making sound decisions. But then it's hardly democracy at all, and even then it's only a temporary fix. Benjamin Franklin once said the "when the people find they can vote themselves money, that will herald the end of the republic." AB
Anonymous said...
GL, Thank you. You explain things clearly. I'd never heard of discursive dilemma. I am enlightened. Humankind commonly seeks fame, power and fortune. These are strong motivations (and often exercised selfishly). They also interact to support each other. Alexis de Tocqueville said: "America is great because America is good, and if America ever ceases to be good, America will cease to be great." He said this in the context of observing American religion (specifically Christianity). He called America's faith the "secret of her genius and power". http://www.usiap.org/Legacy/Quotes/OtherQuotes.html http://en.wikipedia.org/wiki/Alexis_de_Tocqueville#Democracy_in_America There is nothing wrong about being wealthy, but the more of it one has, the greater the temptation to allow it to corrupt. Jesus said, the love of money is the root of all evil. (This is often misquoted as, money is the root of all evil.) We all have a choice to make about our wealth: will we love it..., or love people? -Dave
Anonymous said...
Consequences! Any government begins with the people. Their character determines the outcome every time! We are supposed to be a nation "of the people, by the people and for the people". Not a single comment indicates it is our fault. Take some time to learn about the foundations of America. A Republic is one form of a democracy. The Constituion limits what the government can do. The rule of law includes the safe guards necessary to protect against the vulnerabilities of a democracy. It all comes down to the people and their involvement in government. The character, including moral and virtues such as hard work, makes the difference. Educate yourselves, then get off your dead butts, take some responsibility. It is up to you! Failure doesn't have to happen. So stop whining and do something about it! Oh, by the way, socialism/communism/monarchies/etc also always fail! Get over it!
Anonymous said...
I'm not sure you aren't overthinking the problem of why democracies always go bankrupt but I enjoy the discussion. I think it can be summed up by the word "greed". Something for nothing is part of the human condition. Until Spock (or Ras) take over the planet, the pattern will continue. On a side note, haven't we already been bankrupt twice in the past 100 years? In the early 30's, going off the gold standard domestically and in 1971 going off it internationally. Both of those events were a type of default. The only difference between then and now is that now we are failing at currency debasement (so far).
SPECTRE of Deflation said...
GL, great read once again that actually makes you think outside the box. The question I have is your use of the term "majority" for multiple groups within a finite society while ignoring the minority which are always present. A Conservative and liberal will not overlap on nearly every issue. You have majority/minority for a reason. It's because as you say, there are ideals of what govt. should or shouldn't be about from various groups. At no time are their ideals overlapping. What if there is a majority that strongly believes something such as, "we shouldn't increase the national debt level", but the ruling elite simply ignore the will of said majority just like they are doing at this very moment? 71% are against raising the national debt level to 23% that are for it. They, the elite, can give a rat's ass concerning what either group wants. A strong majority was also against the TARP Bailout, but they gave the public the bird while telling us we really are number one.  Once a Democracy reaches a stage where more than 50% receive govt. assistance of one type or another and can and do vote, you are done. I will also mention that 47% pay no federal income tax at all, and you have the makings of an implosion of biblical proportions. It's my understanding that no Empire has ever lasted more than 40 years once it goes 100% fiat with their currency. If we take Nixon's move in 1971 and we add 40 years to that date, we come up with 2011. I know you know history, so is this a valid observation?
Anonymous said...
As with Game Theory, we will always want more, for less. I see two horns to our problem. One is that we are hedonistic, and Saints at the same time. We want to do what is good, but we don't want to be held responsible for it's doing. I would argue the counter point on Central Banks. I feel they are necessary to smooth out the waves caused by errors in any Market Economy.  The issue is, our system is too much like a Pyramid scheme. The present system only works if, there are always more, and more players joining. It doesn't matter how many join, or what their exact contributions are. Because, they all park assets, that are leveraged. Through Taxes, etc. This ensures a constantly increasing trickle of funds to pay for Government. I have been involved in research from varying disciplines. Often, the results of this research were, there is no answer. I know, there will always be an answer. We just haven't seen it yet. In the Short, to Mid term, the answers will likely be, a combination of fixes will have to occur. Like the waves caused by errors in the economy, the fixes will address these waves. As two are fixed, a third is born! So, this will have to be an on going enterprise. Think of Reverse Keynesian Economics. As the Economy's pendulum swings one way, we introduce patches to the economy through Government policy. As it returns to a more normal position, those returns reach a Sun Set. They end, and opposite policies are instituted to keep the economy from over heating. Both scenarios are based upon the truth that, There will always be Errors in the Economy. They are usually caused by errors in Society! KP
crisis garden said...
>They really do claim that. And no, they are not high. Are you sure?
Anarcissie said...
I notice if someone posts a counterexample to 'all democracies must go bankrupt', as the Swede did, it's simply dismissed -- well, they _will_ go bankrupt at some point in the future.... With that sort of logic one can prove anything.
Anonymous said...
Too much content on this site--it's diluting the quality. This post is evidence of jumping the shark. Your 3 page post could have been concentrated into a U.S. citizen's demands over last 100 years: "give me lower taxes and more services, and I don't care if you borrow to the hilt to make that happen."
Andre Latouche said...
Your conclusion is valid based on your arguments, but your theory is irrelevant since it is based on a false assumption - namely that democracies actually exist. Man has never succeeded in creating a true democracy. It is an illusion built on a dream. And it will never happen. In order for a democracy to succeed, the majority of the electorate would actually have to be intelligent enough to know what is best for society as a whole and then vote accordingly (and not just in their own self interest). - something that will just never happen. The majority of people on this planet don't even know what's best for them. What we call a democracy today is nothing more than an exercise in choosing our own dictator. Once elected, they are accountable to noone, and use their time in office to grab as much power and money for themselves as they can while pretending to represent us. In a true democracy , for example, the people would insist on a balanced budget ammendment which would make it illegal to run a deficit. Any government that couldn't balance the budget would be immediately dissolved for incompetence and required to pay for the cost of a new election out of their own pockets.The Paradox would not be allowed to exist.
Anonymous said...
Yup! We're screwed because the majority of people in America are either stupid or greedy or both. Can't argue with that!
Apollo said...
A sweeping statement like this title is catchy, but not true. Not *all* democracies go bankrupt. Because not *all* people who live in democracy are stupid to the point of self-destruction.  While the USA as a country has a vast positive net worth, the federal government is fiscally on the path of insolvency. It got this way by irresponsible spending on its own, and by absorbing the irresponsible spending and debt of the private sector.  Why? Because USA is all about money. It is so much about money that it has spent and borrowed its way to de facto default. Because it has forgotten how to create wealth, and just create money. There is only one industry specialized in doing that - create money instead of wealth. Yes, the Wall Street racket that a whole generation of people worships. Well, worship the money gods and you get what you deserve.

Post a Comment

Whether you agree with me or not, thank you for your comment. 

I neither answer nor purge any comment, unless it is blatantly obscene, obvious spam, a commercial solicitation, or an obvious duplicate. I never purge a negative comment (as you can see by some of the discussions), so knock yourself out. But I won’t take you seriously if you post anonymously—after all, I don’t. 

If you liked what I wrote—or if it at least made you think—don’t be shy about making a payment. The PayPal button is there for your convenience. 

If you have a question or a private comment, do feel free to e-mail me at my address expat229@gmail.com. 

GL

No comments: