A Tale of Two Americas
There are two Americas. One is based on fierce competition, and one is based on father knowing best. Both Americas are large employers, but in only one America do bad decisions punish the decision-makers and their employees.
Both Capitalist America and Communist America deliver essential services to Americans, but with two differences:
- Capitalist Firms that fail will disappear. Bureaucracies that fail will keep growing.
- Communist America is entirely paid for by taxes on Capitalist America.
The Government Keeps Growing
In America, the proportion of our economy that is controlled by Bureaucracies that have no feedback mechanism for economic failure has been steadily growing for 100 years:
The Need For and The Cost of Central Control
Modern industrial nations need central control of certain essential functions: roads, courts, defense. But central control comes at a huge, inevitable cost: inefficiency.
Industrial nations whose pendulum swings too far over to Communism all crumble for one simple reason: humans are only efficient when they are competing.
The Tipping Point
There is a tipping point, when too great a proportion of a nation’s goods and services are provided by Communism based on taxes on Capitalism. Over that tipping point, the Golden Goose dies by 1,000 cuts, and nations stop growing. If you are in debt and you stop growing, you will default.
No one quite knows where that tipping points lies for the developed world, but Europe’s stagnation is an uncomfortable exploration of the danger zone.
Saving the Goose vs Dividing the Pie
As whole nations approach the zone of insolvency, the classic liberal/conservative argument about dividing the pie becomes a less useful metaphor. Instead we need to focus on Saving the Goose.
The US Census Bureau reported that 49% of households have one member receiving at least one type of government benefit.
The White House budget office estimates that 63% of federal spending next year will consist of checks written to individuals who performed no services in exchange (2012 budget – large file). That number has climbed from 18% in 1940 to 46% in 1975, and it will continue to rise in the absence of entitlement reform.
We need to resist the urge to characterize cutbacks as liberal or conservative because we’re spending money we don’t have. Stopping isn’t conservative, it’s merely sane.
Bureaucracies Never Go Away
Both Capitalist and Communist America are full of ambitious, power-hungry entrepreneurs. The Capitalist entrepreneurs fight each other for market share. If one firm expands in a static market, another shrinks or fails, leaving room for growth.
In Communist America, institutions also fail, but they rarely go away. Instead, failure is often rewarded by budgetary growth. Under this Logic of Bureaucracy, the drug war isn’t successful, so we must not be spending enough to win, so the budget goes up every year.
The Power To Tax
Failed institutions grow by taxing the successful parts of the economy, transferring economic decisions about asset allocation from humans who have created economic success to those who administer economic failures.
Not Demagoguery
All of this talk of Communism may sound like demagoguery. You may be tempted to think that huge areas of nuance are missing. I would argue that they aren’t so critical to understand the big picture: Yes, we need some government, but nations that cannot control the growth of their government institutions will self-destruct as these institutions grow stagnant, growth disappears, and debt grows out of control.
Turning it Around
Unfortunately, turning this situation around will not be without extraordinary pain. We need to find the courage to dismantle failed institutions, and to rebuild only those that contribute to economic growth.
Let’s hope we choose to take our medicine soon, when unemployment is at 9%, rather than being forced to by the bond markets, when unemployment is at 21% (Spain), 17% (Greece), or 14% (Ireland).