The Founders' Greatest Fears About Democracy Are Playing Out

Governments do not produce wealth, they only consume it

By Bill Frezza

Our Founders’ greatest fear that pure democracy would inevitably destroy itself is being played out in two distinct dramas, both headed toward the same ending.

Detroit’s bankruptcy bears witness to destruction by one-party rule. Decades of unchecked corruption and incompetent governance have come to a head, as the accumulated debts of a government willing to buy votes from the non-productive at the expense of the productive fall upon a dwindling populace too poor, dependent, or stubborn to flee.

Washington’s terminal gridlock bears witness to destruction by a dysfunctional, self-serving duopoly. Politicians representing two supposedly hostile parties fight over the frozen controls on a runaway train, even as they remain safely ensconced in gerrymandered districts. With massive entitlement spending growing on autopilot, the only thing forestalling federal bankruptcy is unlimited money printing—which will only make the day of reckoning all the more painful when it arrives.

Both tragedies are enabled by a global financial system that insists on feeding vast sums of capital into the maw of sovereign debtors under the false belief that such debts are “safe.” Yet, the only thing sustaining the belief that these debts will be repaid is the self-deluded notion that future taxpayers will make good on them—somehow.

How is that working out for the bondholders of Detroit or Greece? Where are the taxpayers that are supposed to come to their rescue? Why does anyone believe the outcome will be any different in Spain, Italy, Portugal, France, and ultimately the United States? While sophisticated investors believe they can insure themselves against losses by buying Credit Default Swaps and other exotic instruments, how will they be paid when trillions in capital that could have been invested in productive enterprises have already been destroyed?

Yet in Detroit the beat goes on. Michigan Attorney General Bill Schuette believes he can magically protect the bloated pension and medical benefits of retired Detroit public service employees by invoking the state constitution. If he prevails, who will foot the bill? Where will the remaining 190,000 privately employed taxpayers left in Detroit find $19 billion to pay the city’s creditors? And what fool would lend to Detroit, or other similarly indebted municipalities, if its current bondholders get wiped out in favor of pensioners? What profitable activity will generate the returns to repay any new loans? No one can answer.

The same willful denial prevails in Washington. President Obama speechifies that a moribund economy can be restored by building more roads, bridges, and windmills. Paid for by whom with money that could have otherwise been used for what?

Republicans seem to believe that they can avert fiscal catastrophe by marginally slowing the rate of growth in federal spending while protecting their favored constituents from cuts. They call this fiscal rectitude. Who are they trying to kid?

Only profitable businesses can turn today’s capital into tomorrow’s wealth, by supplying willing customers with products and services they can sell for more than they cost to create.

Defenders of big government claim that its manifold agencies produce many benefits, such as ensuring that our air and water remain clean, our workplaces are fair and safe, our poor are fed, our elderly receive medical care, and our college students are showered with loans. Lovely. How do these “investments” generate cash to repay maturing government bonds? Governments do not produce wealth, they only consume it. How can consumption turn today’s capital into future wealth needed to pay back all those loans? No one can answer.

Are government-sponsored entities like the Post Office, Fannie Mae , Amtrak, and national flood and farm insurance programs supposed to make up the slack? Have you ever seen any such government programs generate sustainable profits rather than losses?

As long as government power remains unchecked, allowing politicians to eat our seed corn while suppressing private sector growth, it matters little whether this happens under one-party rule or a dysfunctional duopoly.

Only a resurgence of America’s productive private sector delivering a sustained economic growth rate of at least 6 percent offers any hope for the future. And only a massive reduction in city, state, and federal government spending can stop us from digging the debt hole more quickly than we can climb out of it.

Does 6% sound like an impossible rate of growth for a developed economy? Why, when President Clinton delivered as much working with a Republican Congress and Ronald Reagan did even better working with a Democratic Congress. Ponder that as Detroit stares into the abyss.