Apparently it’s a mystery why the developed world has low rates of growth.
After trillions of dollars of stimulus, growth in the US and Europe is still extremely weak.
Meanwhile for example China, even while suffering slowdowns, can grow at much higher rates than the developed world.
“Qu’est ce que se passe?” As the French would say or as they now say in the US “WTF.”
Markets are driven by bubbles and the thing about bubbles is people don’t like to see them when their income relies on them staying inflated.
The mother of all bubbles in the west is government.
Developed world government grows and grows. Nothing, not even a massive financial crisis can check their growth.
Developed world government talk about “austerity” and then at the same time increase their budgets. Austerity? Did someone redefine that concept?
However while governments grow and grow, it must be said most people tend to like lots of government.
With personal autonomy and responsibility slowly but surely drummed out of the citizens of the developed world, why wouldn’t citizens look to the state for sustenance and validation.
However there is a glitch in this tendency.
Governments are inefficient. Monopolies never are.
To exacerbate the problem, Government do not directly generate wealth, they redistribute it.
We all know government has a terrible record of running wealth generating enterprises. That’s why they sold them off in the 80’s and 90’s.
The problem is, as government grows, it redirects more and more resources away from wealth generation by siphoning off capital for its non-wealth generating activities. It folds back into the economy but the flow of money is far from optimal. Often the flow it little more than abject waste.
Keynes suggested probably correctly, if you buried money in a mine and let people dig it up, this would boost the economy. However if you simply burry money in a mine and it cant be dug up again, it wont have the desired effect and such government inefficiency is rife.
At some point however efficient a growing government is trying to be its drain on commerce starts to shrink an economies ability to function.
This is the position the developed countries find themselves in today.
Take QE. Where does this liquidity actual flow. It flows quickly back to government, to fund spending deficits and hence in an inefficient, mal-allocated way on into the broader economy. Therefore much QE liquidity therefore ultimately goes either out of the trade deficit door or down the spending drain. Rather than driving growth in the local economy, it fuels growth in more aggressive trading partners who’s commerce is not sucked white by regulation and taxation.
So what is the prescription for turning the situation around?
Economics is about incentives. You have to get the incentives right.
So let us examine the basics.
Tax what you don’t want, subsidise what you want more of.
Lets agrees on that.
Can we? I hope so.
So here we are as societies taxing wealth creation as subsidizing poverty.
What is therefore what is going to happen?
Do we really want to be more wealthy and prosperous? Perhaps our societies do not.
If we do, we are going to have to shift priorities. If you believe taxing something ensures less of it, then why should tax be so steeply progressive?
The trouble is the more government grows the more tax there has to be. It’s a vicious circle. The worrying thing is, government can become absolutely overwhelmingly large and dominant. They can take everything. History is full of examples where those in government took everything and left the citizens in abject poverty. It was one of the reasons America was born, to people left Europe to escape the avaricious and all powerful hands of the governing classes.
Can the government bubble be checked?
If it cannot be checked smartly, it might happen in the same way it has been allegedly checked in the PIIIGS of Europe. Failing that, over time badly managed economies collapse or are overshadowed. It would be sad if Europe and the US have to go the way of Soviet Union, but economics cannot be denied by politics indefinitely.
Right now when you consider how fast developing countries with low Tax burdens are catching the US and Europe it would seem that the once named “developed world” will be overshadowed.
If government needs 100% of private sector GDP to fund its budgets, as most developed countries do, then there cannot be meaningful growth. While not killing the golden goose, developing nations are not allowing it to hatch new golden goslings. It’s a strategic blunder that is costing us dear.
This situation would sort itself but for one simple driver of government behavior.
Governments display extreme “rent seeking behavior.” They simply do not search for enough income to fund themselves; they seek to obtain as much revenue as possible and spend that and as much as they can borrow.
It’s a hopeless wish, but governments should instead try to spend as little as possible and extract just enough to cover that outlay.
Can we imagine that?
Sadly governments are monopolies and like all monopolies their own internal interests soon severely affect the interests and well being of their customers.
That’s why governments ban monopolies and have special departments to hunt monopolies down and to hobble or destroy them.
The tipping point where the size of government creates the very systemic decline that government is supposed to protect us from has long passed. The amazing vanishing US debt ceiling is yet another example of the seeming impossibility of reform from within.
Ultimately, unless something like the Reagan/Thatcher political renaissance happens again, it will be competition from countries like China and India which will turn the tide on the government bubble.
Europe and US’s will after a decade or two of failed growth soon lose their place in the world with their small 300 million populations, as the China and India with their billion people populations speed past the old world economies. All ready the prime real estate of the developed world is being snapped up by the unchained capitalists of the developing nations. That should be omen enough.
But I forget, socialized countries don’t need prosperity and economic power, they have fraternity, social fairness and solidarity to carry them along and of course a huge government to look after everything.
That’s a relief.