What Can’t Go On Forever Can’t Go On Any Longer

Herbert Stein famously said that "if something can't go on forever, it will stop." Stein's law is frequently quoted. It is also, unfortunately, inescapable. I will add to it Blanchard's corollary #1: that when something that can't go on forever, there will come a time when it begins to stop; and #2: that people who wanted it to go on forever will vehemently refuse to recognize that it is stopping.

I think that corollary #1 is pretty obvious, but needs stating. Things that can't go on forever don't always stop at once. There often comes a moment when all the signs are there that the game is over, but that happens well before the fat lady sings. Corollary #2 relies less on logic and more on experience.

As evidence, consider France. Steven Hayward at Powerline directs our attention to a piece in The Economist.

THE French president has more power than any other European leader. And, after the second round of the parliamentary elections on June 17th, François Hollande has, on paper, more power than any other president in the Fifth Republic's history. His Socialist Party now controls both houses of the legislature, all but one French region and most of the country's departments, big towns and communes. The question is: what will this studiously modest man do with such dominance?

…Mr. Hollande will start by cutting the retirement age for some workers to 60, putting the top marginal income-tax rate up to 75%, raising taxes on wealth, inheritance and dividends, increasing the minimum wage and making it much harder for employers to fire workers. Far from curbing the size of the public sector, at 56% of GDP the biggest in the euro zone, he seems likely to expand it. With these policies he is acting against the grain of change in the rest of the EU. This will do nothing to improve France's competitiveness which, as its gaping trade deficit shows, has declined fast. Nor will it make the business climate any friendlier.

Mr. Hollande is responding to the moment by denying it. He is doubling down on the policies that brought France and the rest of the developed and a lot of the developing world to the moment of crisis. The Economist expects that Mr. Hollande will be compelled by reality to reverse course, just as Francois Mitterrand was when he tried to institute socialism in France in 1981. The Economist also notes that France is now in a much weaker fiscal position than it was in 1981.

For a second case in point, consider California. Governor Jerry Brown had proposed closing seventy of that state's almost three hundred state parks. That's the kind of thing you have to do if you want to build a bullet train from nowhere to nowhere when your state is going belly up financially. It is a bit of a shock. From the Mercury News:

Brown, a Democrat, and his predecessor, Republican Arnold Schwarzenegger, drew significant criticism for their attempts to close state parks to save money. In the 110-year history of California's state parks system, no governor has ever closed state parks, even during the Depression, to balance the budget, largely because they represent less than half of 1 percent of state spending, and also because they remain politically popular with both parties and drive tourism

Okay, state parks are wonderful. I have spent a lot of time in them. If you want to save them, you have to be able to afford them. Sacramento is between a rock and hard place. It can't sustain its present budget but it can't cut anything and can't raise more revenue without further depressing economic growth.

What couldn't go on forever is the blue state model: always increasing spending, always taking an increasing bite out of the productive economy. That went on for a long time, so long as the general economy was growing robustly. Sooner or later it had to cut into economic growth. What couldn't go on forever can't go on any longer.

Comments

[Donald Pay]

So, you support the red state model? Depending on the federal government for your economic survival and services, which most red states do, requires the productivity of the blue states to survive. If you turn blue state into red states, the red states are going down big time because they can't cut it on their own. Be careful what you wish for. I doubt your job would survive.

[A.I.]

Lets just deconstruct one basic premise you present KB: that government takes money out of the "productive economy". What gives you the idea that only the private sector is a productive economy?

Government pays you to "produce" educated students and you are just one example of a government employee who produces something. Police and fire fighters produce public safety, soldiers produce national security, even the much maligned regulators produce structure for businesses to compete fairly and responsibly. Social Security and Medicare produce wealthier and healthier senior citizens.

You write about economics as though it is a zero sum game; it is not. History shows that growth in government does not necessarily hinder or enhance private sector growth. In recent years, through boom and bust, government has grown with the population and not a whole lot if any more.

Granted, federal deficits have grown exponentially, but that has more to do with smaller revenues than increased spending. And Donald is likely 100% correct, you should be careful what you wish for. Had South Dakota not balanced it budgets (to the tune of a couple hundred million if I recall correctly) with money from the so-called stimulus, it's virtually certain higher ed would have taken a serious hit. And with the current emphasis on physical sciences over social sciences, things may not have gone well for you.

So please excuse this bit of snark but it seems by your reckoning a good citizen, a true patriot would not mind sacrificing his/her government job for the good of the private economy. After all, producing a frappe at Mickey D's is certainly more important than educating a student...or is it the other way around?

[Donald Pay]

Speaking of things that never end, let's look at prisons and defense.

These are mostly government enterprises. Or are they? Most of our bloated military is needed to protect shipping lanes and petro-oligarchs to import oil or to keep the price of oil artificially low. Essentially the Defense Department, CIA and other similar government agencies are just subsidiaries of big oil that taxpayers, rather than the oil giants fund. But the crony capitalists have figured out they can actually stick the taxpayers to privatize at least part of their defense, so that taxpayers can now pay a private company super inflated costs to provide security for the petro-corporate elite.

Prisons were once a gov'mint racket, but crony capitalists have cracked into that gov'mint safe in the red states. You thought crime and punishment were government duties? Uh, no. When you build prisons for profit you want those cells filled, goddammit. So, now there is a market based incentive to increase crime in places where people are too poor to defend themselves. How do you do that? Make anything anyone in the black or Hispanic community is doing illegal, or send the petty crooks to jail, rather than encourage restorative justice.

Our country, especially the red part of it, is sick.

[www.google.com/accounts/o8/id?id=AItOawkCLbFUZQIqjxYgjj64ao-r8UXtC4HSieo]

I agree with the premise that the current system is breaking down. Not just in the US but around the world even though it has been enormously successful. How successful? Since 1750 GDP per capita (Brad DeLong's figures) has doubled every 50 years until 1950. Between 1950 and 2000 it grew 4 times! Stalin called the system that produced this success "Social Democratic Deviationism". Europeans call it Social Democracy. Americans think of it as the New Deal. I prefer the generic term 'regulated capitalism' to the more usual 'market economy'. I think we have learned that unregulated capitalism produces violent boom bust cycles and that making the public sector 100% of the economy produces soul destroying failure. The secret of regulated capitalism's success has been a healthy balance between the privater sector and the public sector with government keeping the system in reasonable balance with regulation and fiscal policy. The reason this system can't go on any longer is because it has run out of headroom. In the past every time the economy faltered the government bailed it out with Keynesian stimulus and in the process grew the public sector. Europe, not having to spend much on the military, devoted an even higher percentage of their economies to the public sector. It worked because the private sector grew enough to cover the expense. Also governments for perfectly understandable human reasons largely failed to run surpluses in good times to compensate for the deficit spending. The dot com bubble produced a jobless recovery - in retrospect that was when regulated capitalism 'began to stop' as per corollary 1. The property bubble was much more serious of course and we had to put in huge amounts of money we didn't have just to keep things from truly crashing. But we don't have the excess capacity in the private sector to retire the deficit spending - we just don't have the headroom that FDR had at the beginning of the era of regulated capitalism when government was relatively tiny. When President Obama said the private sector was doing fine, I agreed with him. It's growing - thank goodness. Where I disagreed with him was his assertion that the public was lagging in job creation. What I believe we have to do is rebalance the economy gradually so that we convert public sector excess into private sector growth. It is hard to trim public sector fat for two reasons. If you throw too many people out of work too fast you will create a depression and social mess. Second, public sector jobs don't get eliminated by the market nearly as efficiently as private sector jobs. A good example is that highly educated college professors are being paid out of tax money to produce a large surplus of graduates that end up flipping burgers. They may be miserable but at least the graduates are making a real contribution to GDP and not consuming taxes like their professors. If they are on the bong and food stamps, well... I'm exaggerating of course but I'm trying to make the point that we have serious structural imbalances. The establishment - both parties -wants to continue to rely on what Walter Russell Meade calls the Iron Triangle of Big Business, Big Unions, and Big Government. That is exactly the structure that is coming to an end. I think the most obvious structural change we could make is to encourage small business. Accountants tell small business startups to save 50% of their revenue to cover taxes and other charges. That's enough to create a gray economy and we all know one already exists. Making starting a business easier is a way of crowd sourcing the next big thing. Sarbanes Oxley does exactly the opposite by forcing successful startups to cash in by selling out to the giant companies like Google which all too often kill the idea and the new value created. The JOBS bill, in so far as it allows 'Kickstarter' style funding for startups (and relief from SOX compliance) is going in the right direction.