Democracy Reaches Its Limit

Government finance at all levels seems to be unraveling. The city of Stockton, California declared bankruptcy. North Las Vegas, Nevada would be in the same boat if the state of Nevada allowed for it. Michigan’s state government has taken over the management of four cities, and the state’s largest city — Detroit — has a $200 million deficit and has made a deal with the governor for the state to have a hand in fixing the city’s financial problems.

On the federal level, the bond rating agencies — S&P and Moody’s — have dared to downgrade the government’s debt.

On the other side of the pond, Greece is an accident that keeps on crashing. Spain’s government is propping up its banks with European Union help, so that these banks can keep proping up the government by buying the government’s bonds — the equivalent of two drunks holding each other up. And the sad fact is Italy, Portugal and possibly France are not far behind.

In a recent interview, Hans-Hermann Hoppe — the author of the forthcoming The Great Fiction: Property, Economy, Society and the Politics of Decline — explained:

“… it is democracy that is causally responsible for the fatal conditions afflicting us now. The number of productive people is constantly decreasing, and the number of people parasitically consuming the income and wealth of this dwindling number of productive people is increasing steadily. This can’t work in the long run.”

Democracy is just a wealth-distribution (and ultimately wealth-destruction) scheme that pits the taxpayers vs. the tax eaters. In the case of Europe, Germany and the Netherlands produce and save, while Greece, Spain, Portugal and the rest consume. Eventually, a bankruptcy will bring to light the truth about democracy, which, Hoppe explains:

“…is nothing more than an especially insidious form of communism, and that the politicians who have wrought this immoral and economic madness and who have thereby enriched themselves personally (never, of course, being liable for the damages they have caused!), are nothing more than a despicable bunch of communist crooks.”

Over here, the day of reckoning for the US may not be far off. Alan Hall, writing for the May edition of The Socionomist, writes that the era of big entitlement spending in America is over. Since the Great Depression, government entitlements have exploded, up 17-fold, as a percentage of total personal income. Hall uses Elliott Wave nomenclature to describe the phenomenon:

“advance in entitlements from the Great Depression fits within a classic parallel trend channel drawn off the lows of waves 2 and 4. Elliotticians will also observe that wave 4 in entitlements is testing the upper parallel of the channel and needs only one more decline and rally to complete the pattern.”

Socionomics is all about the collective mood of society and how it is reflected in financial markets, politics, fashion and so on. Hall points out that entitlement growth slows during positive mood changes (3% average gain) and accelerates dramatically (215% on average) during negative mood phases.

Americans are more dependent on government benefits than any time in history, according to Hall’s work. “Seventy-five years of positive mood trend has entrenched the idea that the state can afford to support an ever-expanding percentage of its citizens, including even the more affluent,” Hall writes.

Government help is not just for poor people anymore. Binyamin Appelbaum and Robert Gebeloff point out in a New York Times article that government benefits to the bottom fifth of households had declined from 54% in 1979 to 36% in 2007. Applebaum and Gebeloff write:

“The government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits. A secondary mission has gradually become primary: maintaining the middle class from childhood through retirement.”

The Congressional Budget Office (CBO) figures that with an aging population, the trend is clear: Benefit programs will increase nonstop for the next 25 years.

But the Socionomist folks at Elliott Wave Intl. believe there will be a major negative mood extreme around 2016, and there will be a reversal of historic proportions four years from now.

Even the Treasury Department concedes there will be a problem by 2080, when entitlement expenditures could exceed 60% of GDP, “making the federal government’s fiscal path even more unsustainable…”

However, government’s largesse will hit the wall long before then. Entitlement spending reached 102% of total federal tax receipts last year, so paying for the rest of government is covered by borrowing and printing, only allowed because of the dollar’s reserve currency status. But the last grain of sand is about to hit the bottom of the reserve currency hourglass.

Professor Hoppe doesn’t make his points with graphs and waves, but instead uses logic to theorize that democracy is not the wonderful system that American presidents spend so much money and so many lives spreading around the world.

Democracy, simply, in Hoppe’s view, decivilizes society. Civilized people save and plan so as to take care of themselves and their families in the present and future. Fiscal conservatism and prudence is valued in a nondemocratic society, as are sound ethics. Democracy undoes the tendency for people to act cooperatively and responsibly.

Politicians constantly look to appease voters with more benefits to care for them from cradle to grave, so as to win the next election. At the same time, the bureaucracy that hands out the benefits grows larger and larger and is unaccountable to anyone — especially voters.

As the old saying goes, “No matter who wins, the government is always elected.”

In order to distribute these benefits, the government must violate property rights. Government produces nothing; it must take from one group in order to give to another. Hoppe makes the case that individuals are powerless to protect themselves from government theft and view taxation as they would natural disasters. This alters the behavior of producers, who will tend to be less future-oriented, given that government is constantly stealing from them.

This continuous theft, overtly through taxation and subversively by way of inflation, raises the producers’ time preferences, and they divert resources from producing future goods to present consumption. Over time, democracy leads to a lower level of capital being accumulated. With less capital, society is not only poorer, but less civilized.

In Democracy: The God That Failed, Hoppe explains:

“if government property-rights violations take their course and grow extensive enough, the natural tendency of humanity to build an expanding stock of capital and durable consumer goods and to become increasingly more farsighted and provide for evermore distant goals may not only come to a standstill, but may be reversed by a tendency toward decivilization: Formerly provident providers will be turned into drunks or daydreamers, adults into children, civilized men into barbarians and producers into criminals.”

So what has kept this destructive force — democracy — alive for so long? Ironically, capitalism. Hoppe responds:

“That the whole democratic house of cards has not yet completely collapsed speaks volumes about the still tremendous creative power of capitalism, even in the face of ever-increasing governmental strangulation. And this fact also allows us to conjecture about what economic ‘miracles’ would be possible if we had unimpeded capitalism liberated from such parasitism.”

So many people mistakenly tie democracy and capitalism together, when in fact democracy keeps capitalism from making all producers prosperous. Laissez-faire is not a matter of electing the right person; it means simply “leave it alone,” something politicians cannot seem to do.


Douglas French,
for The Daily Reckoning