Tuesday, January 8, 2013

The End of a Dynasty

For years and years I used to wonder about the dynasties in China.  I would read about how a dynasty got old, how it failed to keep up the armed forces, how eventually marauders from the north--Mongols, Bannermen, whatever--would sweep down and kick the existing dynasty out.

OK, fine, I would think.  But how does it work?

I think I can now understand the process, face to face, as it unfolds before our very eyes.  Of course it helps to read Reinhart and Rogoff in This Time is Different.

The simple fact is that governments are armed minorities, and they stay in power by giving money to their supporters.  When a government first takes over, by military conquest or by a political movement, it doesn't have too many supporters to support.  So it has plenty of money to spend.

But over the years the government has to pay out more and more to keep the supporters happy.  And the organized supporters get better and better at extracting support from the government.  Eventually the government runs out of money, it defaults on its sovereign debt and on its promises to its supporters, and finds itself unable to resist some new political force that swoops down out of the north--or the east or the west.

You can see the process working on our present dynasty of the educated elite.  It started in the 19th century with a moral crusade to help the working man, and prevent exploitation of the miners and the factory workers by their ruthless employers.

Today it's simply a racket.  The government takes in huge bounties from working people in the payroll taxes and even more from businesses in the form of incomes taxes and regulations, and then distributes the loot to its supporters.

The urgency with which the Democrats in power are using every ounce of political muscle to increase federal taxes is just an illustration to show what is going on.

The problem is that the more the government expropriates to spread out among its supporters the less is available to grow the economy.  Liberals tell themselves bedtime stories every night about how government spending is essential if everyone wants to be tucked in at night, but the numbers tell a different story.

When the government gets in a jam and can't sell its debt to the market, the way out is with "rescheduling debts", i.e., debt default, and spending cuts.  It's been done again and again.  Of course, when you do that you get a couple years of zero growth as the economy adjusts, but after that you get robust growth.

But the current dynasty can't afford to do that.  Their supporters are not moral crusaders, willing to give up a little for the sake of the nation.  They are simple rent seekers, whether seniors like me that want their entitlements or government employees that want their tenure and their pensions, and they want their money, now.

Otherwise, what's the point of voting for a bunch of thieves and demagogues?

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