Was This Time The Last Time?

Duly Noted

Dulled are the instruments of government intervention in free markets.

The evolving data that expresses the global economy’s pulse might have odd aspects. Even so, it falls behind the outlandish economic performance of our governors. Even if everybody bemoans the “crisis”, the subject remains too tempting to avoid. Here, the question that arises is “the crisis of what”.

Nearly a decade ago, this writer has discussed the issue of state intervention. The piece dealt with the hopes behind “stimulation” and the perspectives of the attempts to control what would otherwise take care of it. Since the prediction about the instruments’ limited use and increasing misuse panned out, it is soothing to remember one’s own pronouncements.

Confirmed “gurudom” feeds vanity and makes the central claim easy to recall. Intervention to give the economy not only guidance but also to change its course is approaching the end of its usefulness. The weapon is as a sword misused to chop wood: the cutting edge is increasingly dull.

Essentially, the argument behind the claim was that the size of the means of governments and the volume of the economy to be influenced are moving in opposite directions. While the size of the privately controlled economy grows rapidly, the sate’s economic instruments expand only at a limited rate. As a trend, government intervention loses leverage and is growing less effective. Traditional government rescue in the context of individual capitalism –as against state capitalism- is losing its effectiveness. The writer felt then that, what we might now call “the crisis before the current one” could be the last instance when governments can create positive economic realities.

Those who watched Obama’s speech on the economy after the S&P downgrade saw their suspicions of politics’ crisis management confirmed. The President might have been right that America is an AAA country. That makes her rated soundness as AA+ a shame. During the soothing speech, the Dow sent a message. It fell by 200 points. With that, as an investor, the average person has put his dollars where in his judgment of the doctor’s credibility lay.

The conclusion of the occurrence is that dreaming the triple-A American dream might be justified. However, waking up to the reality created by mismanagement, erroneous concepts has the urgency that, in the case of fires, is expressed by sirens.

Not only in America’s case, the noise from the battlefield of economics is due to lacking confidence. Some of that is rooted in the self-evident. When too much is spent not on investments that produce returns ultimately but on political projects that are pay-offs, then it is normal to call for reduced spending. The will of those that govern us to shrink excessive outlays does not convince creditors that sounder practices will follow. Add that often the addiction to free lunches is of long standing. For decades, “sacrifices” for the common good have been unheard of. Bringing up blood, sweat and tears is only a signal to vote for the other guy that promises that “more of the same” will continue. Indeed, governments that wish to save, risk violence by those that feel entitled to privileges. Reform within the framework of the existing system is hardly makeable.

Another item emerges if we face the “impossibles” that are the prerequisites of a cure. To regain stability, some economies need to put their revenues in order. There has been a tendency to prevent their unmasking by cooking the books. Part of that involved cheating on the efficiency of tax collection. Such manipulations occurred with the knowledge of “Europe”. This was done to protect the integrity of the system created by the inclusion of unqualified candidates; to serve the interests of a centralizing bureaucracy; to support governments for whom the “center” had an ideological affinity.

Further factors are co-responsible for the crises symbolically represented by “Greece”. Reforms demand political stability in the context of which leadership can repair the damage. However, cutting spending is politically difficult. For one thing, the Socialist past has undermined the sense of good citizenship and the willingness to make sacrifices. Marxist “science” questioned the ties between wealth, performance and success. Grabbing what one could, made more sense than did “giving according to one’s ability”. Leadership is unlikely to appear when its medicine is refused by society.

Restoring economic health depends on tax revenues, as the state’s useful services need funding. Revenues presuppose servicing the debt and the reduction of the capital owed to –perhaps naïve- investors. Discouragingly, the countries that are now officially in trouble and those that have still not been outed, share a trait. It is that the current calamity is partly caused by the inability to collect the taxes levied. The reform sold abroad as a prerequisite for giving more good money to bad debtors, distorts when new taxes to pay the bill are promised. The problem is not new revenues but to collect the hitherto uncollected. The way such societies function makes collection difficult as it goes against the folkways of local culture.

Implementing improvements in the realm of saving, efficiency, revenue, and making the average person see compliance as being his enlightened interest holds bad cards. Privately all seem to know this. Therefore, the major global firms sit on hoarded billions while they wait for better times. If invested that capital would create jobs, increase productivity and overcome the crisis. Not all this is happening. It is so, not because the private economy is ailing. Sick is the economic policy of states. This crisis comes from governments that hurry to the rescue of entities that do not need more money but changed directions. While the broke pledge to finance the busted, confidence in government is withering. Since long, the attention of the wary has shifted from the officially bankrupt to the donors that promise rescue. (While this was written, the news emerged that German and French growth is stagnating.) It is safe to say that others would follow America’s downgrade if politics would not intervene.

As stated, this turbulence is a political crisis unfolding in the field of economics. Economics is the realm in which the “state” is the least competent to act. As such, it reflects –not unlike the collapse of the USSR- the known feebleness of collectivism and its policies. Any hoped recovery – by financing credits to Greece 30% of which Spain and Italy guarantee- will not cure the sick man.

The coming recovery will lend us borrowed time. That is a chance to change the system. It is likely to be wasted. While genuine reforms will be on the back burner, smart money will ponder whether to flee into gold or the Swiss franc and the like. The eventual offering “Eurobonds” is a project that is officially denied. Instead there is to be an economic government for the €-zone. This puts a new layer of government on the current one. If that fails, Eurobonds will be resorted to. These will be credits to failed countries for small returns guaranteed by the “North”. The bonds will cater to the illusions of the gullible. The investors will quickly discover that they hold papers paying dividends for low risks while the repayment backed by high-risk sovereignties. People are easily cheated. Yet, it is hard to keep them believing in fairy tales forever. Real trouble and general ruin will be upon us when the inevitable awakening happens.