There’s been a lot of ink spilled lately on the likelihood that the nation of Greece will default on its public debt, and why it is utterly necessary for the European Union and the U.S. must ride the the rescue with some sort of fiddle involving a combination of (a) massive taxpayer-funded loans, (b) cramming changes in the terms of Greek government bonds down bondholders’ throats, and (c) stern finger-wagging at the Greeks.
Lost in the eye-glazing babble about maturity extensions, haircuts, and which acronymic organization is going to funnel the money into place is the real magnitude of the stakes here. It’s not just the Greeks’ opera-bouffé parody of the modern redistributionist state that is circling the structural-insolvency drain; what really terrifies our political class is the prospect that, very soon, the investors simply won’t buy government bonds anymore – and massive borrowing through bond issues is the only thing keeping the redistributionist state afloat.
As I have documented many times on this blog, the entitlement-spending commitments of the U.S. Federal government, most U.S. state governments, most European governments, and indeed most national governments everywhere exceed the capacity of their economies to generate wealth. And demographic trends are making the imbalance worse over time, not better.
This is why raising taxes won’t help. The amount of private wealth available to be taxed is insufficient, even if taxation could be raised to 100% without suppressing all economic activity. In practice, raising taxes leads to increases in spending which more than consume the increased revenue (by a ratio of 1.17:1 in the U.S. since the 1940s).
Cutting military or any other form of discretionary spending won’t work either. If you zero all that stuff out, public pensions and other entitlement commitments still require revenues larger than the taxable private economy can generate.
Nor will productivity growth do it. Mature economies have annual productivity growth in single digits; mature redistributionist states have annual spending growth in double digits. The problem is structural; the Olsonian interest-group scramble generates pressure for increased spending faster than the underlying economy can grow.
Everywhere, the gap between political spending commitments and revenue has been covered by borrowing. The entire system of redistributionism, in which the political class buys the consent of the governed with ever-increasing handouts, has come to depend on the assumption that the bond markets will always be there to be tapped for cash to fund next week’s bread and circuses.
That is the assumption that is now under threat. Greece must be bailed out in order to preserve the illusion that the borrowing can continue indefinitely, that the bill will somehow never come due. When the political class speaks of “contagion”, what they’re really worried about isn’t the solvency of German banks holding Greek paper, it’s a general flight of investors from the sovereign-debt markets.
Our political class, like the aristocrats of the French ancien regime, believes in nothing so firmly as its own indispensability. Après moi le déluge; but when the bond-investor flight happens – and it is now a matter of when, not if – the teetering Ponzi scheme that funds their self-importance will collapse.
You think it can’t happen here? You think structural insolvency is only for volatile Mediterraneans with silly folk costumes and ouzo habits? Then I’ve got one word for you: California.