Green Room

The Great Crash

posted at 6:12 pm on February 4, 2010 by

During my college days in the early Nineties, I read a study that projected tax rates into the future, assuming government spending remained fixed at early Clinton levels. Due to the explosion of entitlement spending brought about by the insolvency of Social Security and Medicare, even the lower income brackets would face something like a sixty percent federal tax burden by the 2020s. Reading this study was one of the most significant events of my intellectual life. I remember thinking, with terrible clarity: That’s just not going to work.

I believe collectivist ideology is an offense against liberty, and also a tragically inefficient means of addressing the social problems it professes to care about. A study of history shows that every form of collectivist ideology has grown increasingly vicious, and eventually murderous, as its ruling elite struggle to retain power. There is one other reason I’m opposed to collectivism: it’s doomed to fail. Even if I were willing to concede Big Government the intelligence and moral stature to control our culture and economy, I would be haunted by the knowledge of its inevitable failure… a destiny written into the DNA of American socialism since the birth of Social Security.

Socialism fails because it’s a static solution imposed on a dynamic society. People respond to incentives, chasing carrots and avoiding sticks. The initial proposition of the New Deal was to provide for the needs of the desperate, by collecting taxes from the wealthy. Unsurprisingly, the system devolved into the vote-buying and corruption we live with today, becoming a heavy wagon hitched to a struggling middle class, which provides far more of the funding than those “fat cats” socialists love to use as whipping boys. Politicians respond to incentives too, and the machinery of the centralized state excels at sucking in tax dollars and spitting out votes. The ugly gears of that machinery are well-hidden behind an illusion of moral authority and seductive promises, alluring enough to compel the faithful support of nearly half the population, even as its unsustainable failures become painfully obvious.

The system was doomed to crash because its vast array of taxes, spending, and regulation destroy the very wealth that sustains it. It ran out of fat long ago, and began feeding on muscle… and now it has worked its way down to the bone. Wealth is a product of choice, and every action taken by a collectivist government destroys wealth by reducing the options available to its citizens. Liberal politicians assume the population will go on blindly producing the same extraordinary prosperity, no matter how much the government skims off the top. That’s why every outbreak of bad economic news is “unexpected” to them, as well as the media who share their assumptions. Has a nation ever grown poorer after reducing the cost and power of its central government? Why would anyone assume a nation could grow richer by reducing the size and power of its private sector?

The towering heights reached by the American economy gives us a long way to fall. Of the dozen wealthiest nations in the world, only America has a nine-digit population. The next largest wealthy nation after us is Switzerland. The system imposed on a population our size is bound to fail with a mighty crash. We take the trappings of our prosperity for granted, and don’t appreciate how complex, fast-moving, and fragile the upper reaches of our economy are. Politicians seeking to micro-manage the corporate world are tinkering with a high-performance engine while it’s still running.

I don’t know exactly what form the Great Crash will take. Social Security has been a ticking bomb for generations, and recently we learned its detonation is much closer than previously suspected. Instead of producing a surplus that helps fund the rest of the government, it has gone into the red… something that wasn’t supposed to happen for over a decade. Social Security was never an “investment” safeguarded by the government. It’s a pyramid scheme, with current payroll taxes funding the benefits of retirees. The original ratio of workers to recipients was over 40 to 1, but now it’s down to three to one… in an economy with over 20% real unemployment, suffering under a government unwilling to do any of the things that would reduce its power, and promote long-term job growth.

Reckless deficit spending has weakened our currency, and hastened the day when Social Security and Medicare entitlements will grow to devour the entire federal budget. Massive tax increases are just over the horizon, awaiting the day when this President feels safe in assuring the voters that fiscal responsibility compels him to unleash them. The point of statist “health care reform” is to make the voters feel the only alternative to those tax hikes is death. The outer limit of New Deal socialism will be reached when overtaxed workers step back from the last few private-sector jobs, and refuse to support dependents who will fight to the death for their benefits.

I suspect the Great Crash would begin long before that ultimate moment of bankruptcy arrived. It could be triggered by an unforeseen catastrophe. By some estimates, the total cost of the 9/11 attacks exceeded two trillion dollars. Barack Obama’s economy would not survive such a blow, especially since his immediate reaction to a systemic collapse would accelerate it, by nationalizing more of the private sector.

Even without a catastrophic trigger, the tragic end of our old system would begin when the job-creating upper class exercised its option to withdraw from the economy, taking money and capital with it. One of the most important attributes of wealth is the range of options it brings. The people targeted most aggressively by desperate socialists can simply leave the system. They can stop investing, hoard their wealth, or move overseas. They can do this very quickly, and they are, by definition, highly skilled at sensing the right moment for dramatic action.

The rich will play along for a good long while, and as you can see from the number of well-connected Democrats raking in fortunes during this recession, they can even profit handsomely by purchasing influence over a stagnant command economy… but when they feel the endgame approaching, they’ll be gone before their old pals in Congress know what hit them. When you hear a leftist declare that all of our problems can be solved by soaking the rich, understand that will never happen, because the rich will jump out of the pool before they get soaked past the knee.

The time of the Great Crash has not arrived just yet. As bad as things may seem now, they can get an order of magnitude worse… and that means we still have time to change course. Your daily life depends on billions of transactions performed at the speed of light, millions of tons of goods shipped across vast distances, and oceans of gasoline flowing from convenient pumps. These complex systems cannot sustain much damage before your life changes in ways you might never have imagined. The people responsible will tell you it was inevitable, or it was all your fault for living so well in the first place. They’ll try to divert your anger to their enemies, and expect you to trade your ambitions for the sustenance they will provide.

We don’t have to let it come to that, if we remember that prosperity is inseparable from freedom, while command offers only obedience and survival. We don’t have to lose much more freedom before we lose a great deal of our prosperity. Every dollar spent by the government is a dollar that won’t be able to generate wealth through choice. We still have the imagination and energy to put the bankrupt ideology of liberalism behind us, before it bankrupts us. We can thank the deluded intensity of Barack Obama and the last true believers of the Left for making it clear how the story of the almighty State will end, in the absurdity of a $14 trillion debt that still isn’t big enough for them. Our grandfathers broke the Axis and rebuilt the world. Our fathers made academics eat every word they wrote about the inevitable triumph of communism. We have one last pitiful offspring of the collectivist dream to bury. We can do it, but it will require vision and leadership.

Simply returning to the bloated budget of George Bush’s final year would require a historically unprecedented cut of over 15% in total government spending. The budget President Obama just submitted would swell the federal workforce to over two million. Trimming it back to where Bush left it would put half a million people out of work. Correcting this ruinous course will be an achievement unlike any the world has ever seen. The world has also never seen anything like the crash that awaits us if we fail.

Cross-posted at www.doczero.org.

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During my college days in the early Nineties…

I am, err… umm…, amazed to find you’re so young. You have the wisdom and polish of someone many years your elder. So I imagine you have a brilliant future ahead. Move over, Charles Krauthammer, Victor Davis Hanson, et al. Meanwhile, it’s great having you at HA.

petefrt on February 6, 2010 at 6:35 AM

There is hope for our young people after all.

Stepan on February 6, 2010 at 7:30 AM

What do you mean if we fail?

We’re a little country what has a horrific percentage of peoples what can review the situation you lay out for us and say hey this looks like a job for Sarah Palin Hope & Change.

God help us.

We’re so screwed.

happyfeet on February 5, 2010 at 8:39 PM

FIFY.

I love trolls who can’t contribute intelligently to a finely expressed opinion so they divert and deflect with their own brand of idiocy. Part of the reason we’re in the trouble we’re in.

Mr_Magoo on February 6, 2010 at 7:38 AM

There were approximately 80 million babies born during the Boomer years (1946-1964). By 2027, our ‘potential’ SSI liability for Boomers alone could be upwards of $960,000,000,000 per year. Using simple math:

80,000,000 x $12,000 per year = $960,000,000,000

Of course, this assumes that all Boomers survive, apply and collect approx. $1,000.00 per month. Obviously, it is much more complex than that – but it gives one an idea of what is at stake here. And it is only 17 years from now. The way Congress kicks the can down the road…

Mr_Magoo on February 6, 2010 at 7:59 AM

Yep. But FDR wasn’t stupid. You could ‘collect’ when you were 65. Only, at that time, average life expectancy was 59. And over the years no one thought to change the date of when you could start collecting (other than to start EARLIER with reduced benefits at age 62).

GarandFan on February 5, 2010 at 8:59 PM

They did, with the ‘reform’ in the 80s, along with increases in the taxes. As a 41 year old, I can (theoretically anyway) draw from SS when I’m 67 and some months. They pushed Doomsday back a few years with this, due to the cash cow that was the Baby Boomers in their earning prime.

A comment on more and more people working for the Government, at all levels: Once we reach a certain number of people working for the State, then they’ll be ‘unable’ to cut government spending. We’ll be putting millions of people out of work, ya know.

bikermailman on February 6, 2010 at 8:11 AM

Doc,
As always, great post.
I’ve been telling friends and family for years that this insane spending is going to destroy us. I remember one of the “boy wonder” economic advisors to Obama, one Peter Orzag (OMB) stating that a 9 trillion dollar debt is unsustainable. The demoncRATS just raised the debt limit to over 14 trillion and it has been said that that ceiling will be reached by the end of March.
The only way to stop this madness is to withhold revenue to the treasury. A good old fashioned tax revolt would starve the machine of funds for the myriad of unnecessary programs.
Without bold action on the part of THE PEOPLE, I fear the good Dr. is correct, the predicted crash will occur; not if but when.

mountainmanbob on February 6, 2010 at 9:01 AM

There is no avoiding this crash. Everything will have to re-value and we must reevaluate our priorities…a bronze statue by Giacometti sold for $104.3 million a few days ago. A statue sold for $104.3 million. What is wrong with us?

allstonian on February 6, 2010 at 9:06 AM

Excellent post all around.

This sentiment is something I’ve been thinking about lately, myself:

Liberal politicians assume the population will go on blindly producing the same extraordinary prosperity, no matter how much the government skims off the top.

Even getting away from entitlement spending, in the larger context of our society and our economy, many people in Washington, on both the right and the left, often exhibit this attitude. That there is something intrinsic about American prosperity and that no matter how much sand you throw into the gears, the system will continue to just hum along as it always have.

We aren’t the richest and freest people on Earth by some kind of historical accident; we were bequeathed a very specific and deliberate system that is being slowly eroded on multiple fronts by cheap politicians who pursue shot term electoral success in the present at the expense of both our heritage and our future prosperity.

johnmackeygreene on February 6, 2010 at 9:27 AM

Dr. Zero is rather bright for a young wipper-snapper.
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B.O.’s tax rate increases will once again prove the Laffer curve.
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As tax rates go up, tax revenue will be reduced.
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It happens every time congress tries to squeeze the economy.
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It’s the Al Capone school of Government.
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esblowfeld on February 6, 2010 at 9:34 AM

Who is John Galt?

RADIOONE on February 6, 2010 at 9:44 AM

I love trolls who can’t contribute intelligently to a finely expressed opinion so they divert and deflect with their own brand of idiocy. Part of the reason we’re in the trouble we’re in.

Mr_Magoo on February 6, 2010 at 7:38 AM

They really can’t find the ability to rationally think for themselves Magoo. While I do place much of the blame on our current educational system, Doc’s point about a generation of entitlement mentality—which is systematically creating a binding government dependency—seems to also “feed the animal”. While many conservatives will win seats in November campaigning on reducing the size of government, I believe we need to revisit the liberal curriculum coming out of our public school systems, and the universities preaching this statist ideology. Instead of preparing a student for the harsh realities of a global 21st century where competition, ingenuity, and productivity will be the reward, we have a current educational system that values self-esteem over achievement with an emphasis on social engineering. Until this changes, it will remain a vicious cycle of government reliance versus individual responsibility.

Rovin on February 6, 2010 at 10:15 AM

Simply returning to the bloated budget of George Bush’s final year would require a historically unprecedented cut of over 15% in total government spending.

Even as someone who has no philosophical qualms with the idea of collectivist policy, I cannot ignore this fact.

The federal government simply does too much. I’d love to see an American society that could provide for those with no means and pursue all sorts of projects in the name of the public good…but doing so on the federal level, as you say at the beginning of your post, just will not work.

Decentralization, even for those with visions of a more equal, collective society, must be the priority for federal policy going forward.

Thats twice in a row I’m finding point of agreement, Doc. Has hell frozen over? :D

ernesto on February 6, 2010 at 10:28 AM

The people targeted most aggressively by desperate socialists can simply leave the system. They can stop investing, hoard their wealth, or move overseas.

If you have the resources, I would suggest just that.

But what of those left without much of anything thanks to a crumbling economy? Hard to do the “stock up on guns/food/etc.” bit when you’re almost broke.

Dark-Star on February 6, 2010 at 11:42 AM

Thats twice in a row I’m finding point of agreement, Doc. Has hell frozen over?

ernesto on February 6, 2010 at 10:28 AM

Maybe more like a “thawing reality” ernesto? I find it refreshing to see you, (if I may), understanding that perhaps the radical direction our current leadership is attempting to take us, might be a “little too aggressive”, with an emphasis on the reliance of our Federal government.

Rovin on February 6, 2010 at 12:17 PM

Well done Doc! First the good news, the National TEA PARTY convention is great, and I’m looking forward to listening to Governor Palin tonight. The bad news, of course is that Doc is right. Unfortunately fixing the deficit spending will not stop the coming storm. We have the dubious honor of front row seats at the collapse of a 300 year old economic experiment in “monetized debt”. Federal deficit spending is probably the last great credit bubble made possible by this “experiment” in monetary implementation before the whole thing collapses. Deficit spending can add energy to the coming implosion but arresting spending won’t stop it. You can almost feel the cracks forming as $14 Trillion (M3) of money attempts to support the weight of $52.6 Trillion in US debt. Monetized debt was a bad idea when proposed to the British Parliment in 1698 and has not improved with age. It does a marvelous job of drowning a government and Nation in debt and that is about it. Oh, on the short term it’s a swell tool for controlling the body politic, unlimited funds will buy alot of media and politicians, but in the long term it always ends the same…. an economic Tsunamia.

From the convention floor.

speed on February 6, 2010 at 12:22 PM

The rest of the “free” world is our parasite. They are free because our armies are there to defend them. When we go down, we’re taking the rest of you with us.

All because the Democrats wanted power.

Mojave Mark on February 6, 2010 at 2:07 PM

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