The End of Profligate Road

 

F. A. Hayek

 

Every now and then comes some new illuminati ready to enlighten us about old failed ideas but with a new twist because “this time” everything will work. It never does, but that has never kept them from trying time and time again – and ruining the lives of millions of people in the attempt.

 

So here we are once again. Call it Keynesianism Round II. Apparently, it was not enough with one Great Depression prolonged by Keynes’ disastrous recipes. Oh, no, some decades later, we needed one more try of the same trite and failed economic policies. It shouldn’t come as a surprise; John Maynard Keynes is one of academia’s demigods so his ideas are alive and well in our institutions of learning and in the corridors of power, ready to wreck havoc one more time.

 

If politicians have always been hooked on spending as a way to buy votes and keep their jobs, Keynes gave them the perfect intellectual alibi to sell us a “free lunch” and keep their addictive spending rolling as if there’s no tomorrow – no wonder politicians love Keynes. Unfortunately, the bad news is that tomorrow has just arrived and it’s time to pick up the tab.

 

Former President George W. Bush’s own words, “I have abandoned free-market principles to save the free-market system” just reflect how our pols chose the wrong way to address the financial disaster of 2008 whose seeds had been planted before, but have been generously nourished by politicians of all stripes during decades.

 

In our most recent boom and bust cycle, when things turned ugly, Keynes’s salvific aura shined strongly once more. First Mr. Bush and, subsequently, the reincarnation of FDR in the shape of Barack Obama gave new life to old Keynesian policies, i.e. more deficits, more stimulus packages, trillions of dollars in fresh new debt, and more, more, and more bloated government. Other countries have blindly followed his example this time, too. The concept of “moral hazard” went out the window – together with common sense – and the bailout circus started its global tour.

 

Austrian economist Ludwig von Mises, the leading classical-liberal thinker of the twentieth century, cleverly observed that, “Government is the only institution that can take a valuable commodity like paper and make it worthless by applying ink.” The European Union is on the right track to join others states that have accomplished that feat. To prop up its failing currency, the EU will take new loans, incur in more bailouts, and print even more money out of thin air, thus making the euro increasingly worthless.

 

Why? In a nutshell, modern governments can’t pay their bills because they have lived well above their means and now they are out of money and credit. In spite of all their politicians’ election promises, states can’t actually provide us with all the entitlements they offer. Taxes don’t suffice to pay for the expenses of the welfare state despite confiscatory rates, Ponzi schemes, and other artful devices. Therefore, in trying to keep their unsustainable promises, governments run ginormous budget deficits and overborrow, sinking us all deeper and deeper into debt.

 

The spendthrift Western political class has set its peoples on an unavoidable collision course, seriously compromising their economic present and future. In addition, the narrative spun by politicians is to blame everyone but themselves for the disaster. To quote economics professor Carlos Rodríguez Braun; “man’s best friend is not the dog, but the scapegoat” – and in the case of politicians, the usual suspect is the free marketplace.

 

Governments tend to dislike the freedom factor of the markets; they actually want to steer the markets and bring them to heel. And states try very hard to accomplish just that through interventionism, taxation, and strict regulation. But, despite their unflinching commitment to straightjacket the markets, states can’t change the laws of economics. Ask the Soviet Union; look at Greece and a Europe that force-fed the single currency and the Union to its citizens – America, take a look at yourself in that mirror before it’s too late. November 2010 may be your last chance.

 

Most politicians don’t understand how economics laws work, thus they are utterly convinced of their power to “design” the economy at will. Their policies created the housing bubble and when it burst and turned into a gigantic financial crisis, what did they do? They tried to fix it the Keynesian way: Spending even more. They have now created an unfathomable sovereign debt bubble to pay for bailouts and government stimulus packages. Only in a Keynesian world could you max out your credit card to go out of debt. That’s precisely what our governments did.

 

If you thought the 2008 bank crisis was bad, Greece is the prelude of worse things to come. In the same way you can’t just ignore the law of gravity, economics laws work inexorably whether we like it or not. When politicians tamper with the markets, the Invisible Hand somehow finds a way to strike back. Political elites have played with our money for decades in an effort to sell us the redistributionist socialist utopia in different versions. Yet, as Margaret Thatcher correctly pointed out, “Socialism dies when it runs out of other people’s money.” Well, we have run out of money now clearly spelling the end of the welfare state as we know it. 

 

You can take the girl out of socialism but you can't take socialism out of the girl. Showing a jaw-dropping ignorance of economics and externalizing her frustration because the markets won’t do as she commands, Germany’s Chancellor Angela Merkel declared on May 6 that,

 

 

 

This statement shows she’s actually a socialist at heart and reveals some unexpected tyrannical inclinations. Her analysis of the situation is out-of-sync with reality by advocating an ill-concealed and ill-conceived form of central planning. It didn’t work in your native communist East Germany, Frau Merkel, nor will it do now. It’s most unfortunate to see that the Western world is in the hands of people with such appalling lack of economic literacy. Most European leaders share Merkel’s view and that explains why Europe is immersed in such big trouble.

 

Merkel and her EU partners are fretting to avoid that one more European utopia goes down in flames. There’s a problem with utopias – they are unachievable. Blaming Europe’s quagmire to “Anglo-Saxon speculators” and the markets won’t help the European Union and its currency to get out of trouble. On the contrary, creating a hostile environment to investment will only exacerbate the existing trust crisis.

 

By now, you can confidently expect politicians to take all the wrong steps as they did in 2008. If politicians bailed out banks, how aren’t they going to bail out states? Yet the revival of Keynesian policies won’t save them this time around, either. In a profit-and-loss system, if you know you will be bailed out because you are “too big to fail,” reckless risk taking becomes a perverse incentive. States are no different.

 

Expect more, larger, out-of-this-world bailouts. The Europeans have just announced their own version of America’s TARP but for states, a one-trillion-dollar megapackage to save the euro and prop up profligate governments in trouble – the mother of all bailouts to date that will make American and European taxpayers liable for hundreds of billions of euros in new loans. Just as TARP was a failure, Greece’s bailout won’t work, either. However, it will be minutiae compared to coming bailouts. Governments will continue going the Keynesian way, running ever-larger deficits and sinking even deeper into debt. The price for this overborrowing adventure will be staggering and history will repeat itself once more. Although the socialist house of cards is collapsing, the political elites will give us hell before relinquishing power.

 

So buckle up; it won’t be pretty, but the powerful laws of economics will ultimately carry the day.