When I
was growing up, finance was mother’s milk to me, especially as I was a bit of a
math geek. But for my formal education, I was trained—rather rigorously, and in
spite of my laziness—as a philosopher and a historian. This odd combination is
why I have such a jaundiced view of economics: I don’t find economics
particularly intimidating, or even particularly challenging—it’s just finance’s
snooty but poor (and slightly daft) older cousin. History’s surprisingly
ignorant and blinkered accountant. Philosophy and Math’s lightly retarded,
Puritanically rigid, and altogether rather embarrassing spawn.
Now, it’s
all good and fine for me to rant about how useless economics is—but these
aren’t empty complaints on my part: I can point to a single, specific,
monumental failing of economics—a failure in the discipline which pretty much
proves my point:
The United States is going bankrupt—and economics
cannot explain why.
In fact, a surprisingly
large number of economists choose toignore the problem of America’s
looming bankruptcy altogether; or claim there is something called a “structural
deficit” (a highfalutin way of pretending that it cannot be fixed, and
therefore doesn’t need fixing); or else—as is the case of the fools backing Modern
Monetary Theory—they make the claim that all deficits are just debts the
government owes itself, so therefore the American government cannot go broke,
so therefore—and let’s ring out the QED—the fiscal over-indebtedness is
actually not a problem because it doesn’t even actually exist!
They really do claim that. And
no, they are not high. Of course, sovereign over-indebtedness does exist, and
it is a problem—a terrible, life-or-death problem: As a lot of
historians have pointed out, sovereign bankruptcy presages and ushers the
collapse of great nations—often violent collapse. And this is
something we want to avoid, no?
Some
schools of economic thought recognize that deficits are bad because they lead
to bankruptcy, and that therefore fiscal budgets should be balanced so as to
avoid them. But they do not explain why this is the case—they
have no argument to explain why deficits happen in the first place. That
these clever Austrians point to something that has happened before, and
therefore infer that it will happen again if similar conditions are met is not
an argument—it is an observation, like saying that the sun has risen countless
times in the east, so it will likely rise again in the east tomorrow morning.This is a true observation—but it doesn’t explain why the sun
will rise tomorrow in the east. Since the Austrians cannot explainwhy deficits
happen and eventually lead to national bankruptcy, they are simply positing them,
much like tenets of a religion. These arguments might appeal more to our experiences
in the real world—especially when compared to the a priori drivel
of Neo-Keynesians, Monetarists, MMT weenies, and their ilk: Peddlers of
arguments as unsound as atonal clamor. But a posteriori arguments
based on intuition and “common sense”—gussied up in German though they may
be, and attractive though we may find them—are of no help, because they are
based on faith, not reason.
If anything has to be taken on faith—if it can’t be analyzed,
its premises scrutinized, and the overall argument judged to be sound or
unsound—then it’s really no argument at all.
I have
the argument that explains why fiscal deficits happen. Moreover, this argument
can explain why fiscal deficits occur in a democracy in a manner which is
different from any other sort of regime. My theory can explain why fiscal debts
in a democracy grow once they start, and it can explain why this growth in debt
inevitably, inexorably leads to the bankruptcy of the democratic regime.
Further, my theory proves—by sound and valid argumentation—that the United
States is going bankrupt right now because of this process.
It’s an overall concept I’ve designated as the Democratic Bankruptcy Paradox: The paradox by which every democracy eventually goes
bankrupt—regardless of the people’s will and intention of keeping it from going
bankrupt.
That’s why it’s a paradox: The citizens of a
democratic state are supposed to control its destiny. They obviously do not want their
nation to suffer bankruptcy—yet in spite of their will and intent, democratic
states always go bankrupt. Always.
This post will outline my proof of why this is
so.
I will first explain the logic of
my Democratic Bankruptcy Paradox theory, and how it is derived from a
rather recently articulated problem in philosophy called the discursive dilemma, or sometimes the doctrinal dilemma; an
aspect of group agency that has been used primarily in legal theory, but which
I’ve realized has some fairly interesting—and radical—applications to
macro-economics and public finance in representative democracies.
I will then explain how the discursive dilemma,
when applied to macro-economics and fiscal policy in a democratic regime, leads
to the Democratic Bankruptcy Paradox. It is here that I will
prove two general conclusions:
• One: Democracies always act
in a fiscally incoherent manner.
• Two: Democracies always go
bankrupt—without exception.
Finally, I will show how
my Democratic Bankruptcy Paradox theory applies to the American case, and
explain why the U.S. governments at the local, State and Federal level spend
more than they bring in—even as their citizens uniformly oppose this state of
affairs.
So, let’s begin:
The discursive dilemma is a recently formulated paradox in philosophy about how
a group’s decisions can be contradictory with the aims of the individual
members of the group, to the point of incoherence. Phillip Pettit, Franz Dietrich and Christian List have done a lot of work
on the issue of group agency, where the discursive dilemma is discussed; see here for a fairly complete reading list.
As with all paradoxes, an example is the easiest way to understand it—so here’s
one:
Suppose there are three of us—you, me and Mary—standing around in the kitchen.
Suppose that you and I believe that p is true, while Mary is
sure down to her very bones that p is most definitely not true.
Mary is just one person—you and I are two. Therefore, a majority of this group
believes p is true.
As I said, Mary doesn’t believe for a second that p is
true—instead, she argues very convincingly that r is
true. For the purposes of this example, p is completely
incompatible with r; not contradictory—rather,
incompatible: Symbolically, ¬(p ⋏ r).
Since Mary believes r is true, and p and r are
incompatible, you therefore fervently argue with Mary about why r is
most definitely not true—if r is true, then p cannot
be the case. And you believe that p.
But as I listen to Mary, I come to the conclusion that r might
well be true. I don’t believe that p and r are both true—because
they are incompatible. I simply believe that r might be the
case.
Therefore, a majority of this group believes r is true.
Which allows us to arrive at our paradox: A majority of the group believes p is
true, a majority believe that r is true—but none of us as
individuals believes that both p and r are
true, because as I said before, p and r are
incompatible.
However, as a democratic group, we believe that p and r are bothtrue—which
is incoherent.
This is the discursive dilemma.
Let me make the example more concrete: I said earlier that you, me and
Mary were standing around in the kitchen? Suppose, then, that we have a cup of
flour in a bowl on the kitchen table: You think we should add yeast and salt in
order to make bread—to which I agree. But Mary thinks we should add eggs and
sugar, to make a cake—to which I also agree, as that too sounds yummy.
As a group, the majority is in favor of adding salt and yeast to the flour,
while another majority is in favor of adding eggs and sugar to the flour. But
even though no individual would conceivably be in favor of adding yeast and
salt as well as eggs and sugar to the flour, that is
what the group as a whole is in favor of: A majority wants to add yeast and
salt to the flour, while simultaneously, a majority wants to add eggs and sugar
to the flour.
And that’s just a big old mess. That’s an incoherence in the democratic
decision-making process.
So how does this apply to macro-economics in a democracy? It shouldn’t come as
a surprise:
You, me and Mary are in the middle of campaigning for our democracy’s budget
for next year.
I am campaigning for the Balanced Budget Bill, which requires that our budget
be balanced—and all three of us, wholeheartedly and without reservations,
agree. So the Balanced Budget Bill sails through.
You are campaigning for the Lower Taxes Bill, which you obviously favor, and to
which I also wholeheartedly agree. Therefore, the Lower Taxes Bill has a
majority—and it too passes.
However, Mary is campaigning for the More Government Services Bill, to which
which I also wholeheartedly agree, creating another majority—and it too passes.
You may say to me, “But your position is contradictory!” But I reply,
“Certainly not!”
In fact, I did my civic duty: I listened to all the arguments, and I voted
for all the bills. I think we should cut taxes—so when it came to a vote, I
voted in favor of the Lower Taxes Bill, which passed. But I also want more
government services—so when itcame to a vote, I voted in favor of
Mary’s More Government Service Bill, which also passed.
And all the while, I’m still in favor of my law, the Balanced Budget Bill, for
which I voted.
Thus, as a group, we have an incoherent outcome: The majority of
the group believes taxes should be cut—and at the same time, the majority of
the group thinks the government should deliver more services to the people. All
of the members of the group individually do not want a deficit, but as a group
their incoherence leads to a deficit.
This is the democratic fiscal incoherence, a situation unique to
democracies.
All democratic regimes eventually reach a state of fiscal
incoherence—in fact they reach this state every year, at budget time: A
majority of the people want lower taxes while at the same time, a majority of
the people want more government services. That is because all people want to
pay less and receive more, a self-evident proposition.
A democratic regime has to resolve its fiscal incoherence every time it
happens—that is, every year a new budget is proposed. If it doesn’t, it will
not be able to operate the following year, as it will not have the money to do
so. (This of course is assuming an independent Central Bank that will not
money-print away the dilemma.)
If the democracy’s government
can only spend such revenue as it actually receives (and there is no Central
Bank funkiness), then the electorate will be forced to come to grips with the
incoherence of its decisions in the chambers of its parliament or congress: The
democratic representatives of the electorate, be they MP’s or Congressmesn,
will slug it out—proponents of cutting taxes fighting proponents of more
government services—until eventually, a service is cut or a tax is raised, so
that the budget is fully covered: This way, the democratic fiscal incoherence
is solved, year after year.
The only way a democratic
regime can avoid having to resolve its fiscal incoherence is by issuing debt.
Some democratic regimes do not have the credit-worthiness to issue unsecured
debt—so issuing debt is simply not a possibility. In fact, all democracies
at least initially are constrained from issuing debt because of their
circumstances. They are forced to resolve their annual fiscal
incoherence—either government spending will be lowered, or taxes raised, but it will be
thrashed out and resolved one way or another. No one will lend them the
money—so they have no choice.
However, as each successive, successful resolution of the democratic fiscal
incoherence takes place, paradoxically, the democratic regime becomes more
credit-worthy: The cost of borrowing goes down with each successive,
successful resolution of the democracy’s fiscal incoherence.
When it finally reaches the point where credit is so cheap, and the cost of
resolving the annual fiscal incoherence—politically, emotionally,
practically—is higher than the cost of taking on debt, then a subtle crisis
point will arise: The democratic regime will “postpone” the resolution of its
fiscal incoherence, and instead take on debt.
This is the tipping point: This is the first step on the path to ruin for a
democracy. It’s a subtle moment, but it’s key—the moment when the
democracy decides not to resolve its fiscal incoherence, and
instead paper over the incoherence by way of debt.
All democracies reach this point. The United States reached it
in 1975, when it failed to balance its budget for the first time in peacetime,
and never balanced it again.
Once the democratic regime fails to resolve its fiscal incoherence one year and
instead covers the shortfall with debt, the democracy enters a debt spiral: The
cost of resolving the fiscal incoherence of the electorate is double what it
was last year (last year’s cost plus this year’s cost), while the cost of
borrowing in order to paper over the fiscal incoherence has likely remained the
same, or risen only slight. Therefore, the cost of borrowing the second year is half what
it was the first year. And the third year? Assuming the costs of debt haven’t
risen significantly, the debt is cheaper still on the third year, when compared
to the costs of the accumulating, unresolved fiscal incoherence of the previous
years.
This is how every year, the costs of additional debt falls in relation to the
cost of resolving the accumulated fiscal incoherence. And this is how it will
continue in a democracy, as its debt spirals.
So long as the cost of issuing debt remains lower than the political,
financial, personal, social, and emotional costs of resolving the democratic
fiscal incoherence, then the deficit will continue (or expand), and the total
fiscal debt will grow—because each of the majorities will want more of what
it got with each passing year.
This is the problem of unresolved fiscal incoherence: Each majority in a
democratic regime becomes accustomed to getting its way, and not reaching a
compromise or accomodation with the other majorities that would be necessary,
were the fiscal incoherence of the democratic process forced to be resolved.
Thus, the majority which wanted lower taxes expects and demands even lower
taxes the next year—while the majority which wanted more government services
expects and demands more government services the next year too.
Thus does the debt spiral
accelerate. An although no one wants more fiscal debt, the failure or
unwillingness to resolve the fiscal incoherence—and the ease of issuing
unsecured debt—makes the elimination of fiscal debt in a democracy impossible.
This is exactly the situation happening in the United States today—and it is a
natural, inevitable byproduct of not resolving the democratic
fiscal incoherence.
In the U.S., majorities
wanting lower taxes and more defense spending get their way, while at the same
time majorities wanting more government services and entitlements and goverment
macro-economic stimulus get their way too—all happening while the overwhelming
majority of the population is fervently opposed to deficit spending, which is
geometrically adding to the fiscal debt.
This is my Democratic Bankruptcy Paradox theory in action, as applied to macro-economics and fiscal finances in the United States: The democratic state incurs a deficit and fiscal debt which the overwhelming majority of the population do not want—yet are powerless to stop.
(Some might claim that the
discursive dilemma as it relates to macro-economics only happens in a
democratic state where all of the citizens have an equal vote. This line of
argument might conclude that if there was a smaller group of people with
decision-making powers, there wouldn’t be this incoherence. The counterargument
is, If there were some voters whose vote somehow counted for more, then the
Democratic Bankruptcy Paradox would occur again, only this time in this smaller
group, with all the same effects; call it the Oligarchic Bankruptcy Paradox. We
can regress to smaller and smaller groups—from oligarchy, to technocracy, to
committee, to triumvirate—but the Bankruptcy Paradox will always happen, unless
there is a single man who decides the issue of fiscal policy—and that man’s
name is Dictator.)
As the debt burden in a democracy grows because of the failure to resolve the
fiscal incoherence, the total debt inevitably reaches a point where it is
unsustainable. People can argue the exact point where fiscal debt becomes
unsustainable—100% of GDP, 120% of GDP, or some other figure. But that issue is
irrelevant for this discussion—all we have to agree on here is that such a
point of over-indebtedness eventually, inevitably happens. I doubt anyone will
find this presumption controversial or debatable.
Therefore, once a democracy’s debt reaches a point of unsustainability—either
because it cannot borrow more, or it cannot service the debt it already has—the
democracy becomes bankrupt.
So as you can see, this always happens, in every democracy:
Failure to resolve the yearly fiscal incoherence of the democracy leads it to
take on sovereign debt, which leads to a debt spiral, which leads to
bankruptcy—every time.
There are several well known outcomes to a nation’s going bankrupt—none of them
pleasant, some of them quite awful. Again, a presumption that should not be
controversial or debatable: Most of the outcomes of a national bankruptcy are
worse than the sacrifices made to avoid bankruptcy. Therefore, national
bankrutpcy should be avoided
Now, the solution to this problem—how to avoid national bankruptcy—is quite
obvious: Avoid taking on sovereign debt in the first place.
But the problem, as pointed out earlier, is that debt becomes cheaper as a
democracy becomes more successful at resolving its fiscal incoherence. In every
successful democracy, the point where the cost of taking on debt is less than
the cost of resolving its fiscal incoherence will always arrive—it
is inescapable. And when that point is reached, people will rationally
decide that taking on sovereign debt and kicking the can down the road
is a better choice than resolving the fiscal incoherence of the electorate.
This is why democracies will always, in the end, go bankrupt.
This is why the United States is going bankrupt now.
The United States was generally very successful in resolving
its fiscal incoherence since the Revolution of 1776 until 1975. Debtwas taken
on—but only in exceptional cases, almost always war. See the following chart.
As can be readily seen, the
periods of large debt occurred during and after the Revolution, the War of
1812, the Civil War, the First World War, the Great Depression, the Second
World War.
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