Avoiding Financial Collapse

Our current political leaders--and their sycophantic hangers-on such as New York Times columnist and recent Nobel laureate in economics Paul Krugman--do not care about tomorrow. They are concerned only with today. Yesterday provides no guidance to inform us of the likely consequences of today’s actions; furthermore, tomorrow never comes, so who cares? Thusly, our government piles debt upon debt with the promise of even more debt in order to bribe the people to remain quiet about the loss of their liberties.

The latest insult to our intelligence is the promise that replacing our current healthcare system with one run by the government will provide not only more access but cheaper access for all. One need only observe that if this were the case, why those of us who are satisfied with our current healthcare plans must sacrifice them in order for these unnamed others to receive better care. Is there something about our current, private care that deprives others of care? Of course not. If government wants to create a new, expanded welfare program, let them sell it to the public in a straight-forward manner as a new spending program that must be financed out of new taxes or cuts in other government programs. Since government is not willing to do this, we are left with the conclusion that providing a new welfare program is not the real purpose of the government’s healthcare proposal. The real purpose is to amass new, expanded powers for government to rule over us. The phony “crisis in healthcare” that must be solved through complete government control of the industry can be explained in no other way.

The Ticking Debt Bomb Will Cause the Dollar to Collapse

But this essay is not about the attempted government takeover of healthcare, but about how government will finance such an undertaking. In the preceding paragraph I said that government can increase taxes or cut current spending on some other program to finance its healthcare adventure. But government has a third, more stealthy way--it can create debt. And this is what government is doing on an unprecedented and unsustainable scale. Total U.S. debt as a percentage of GDP is close to 400% and rising rapidly. As Frankfurt economist Thorsten Polleit explains in his recent essay “An Unsustainable Path to Debt Expansion” (http://mises.org/story/3754), even the most conservative upward trend will cause total economic collapse within a few decades. The cause of this collapse will be a loss of confidence by holders of dollars that debt can be repaid without continuous reductions in the purchasing power of the dollar.

Now, this sounds very academic, doesn’t it? Most folks’ eyes glaze over when one discusses things like monetary debasement, loss of money’s purchasing power, etc., as if these terms were of academic interest only. But what if you knew that that the dollar in your pocket would be as worthless as a Zimbabwean unit of currency within a few years? Would you seek to amass as many dollars as possible, even selling assets to obtain dollars? I doubt it. You would seek to get rid of dollars and dollar denominated assets in exchange for something that would not fall in value. Ludwig von Mises called this phenomenon the “flight into real value”. When the holders of dollars believe that currency debasement (fall in the value of the currency) will not stop but rather will accelerate, they will attempt to get rid of dollars as soon as practicable. Professor Polleit points out that since the dollar’s final break with gold in 1971 the relative debt burden of the U.S. in relation to our economy’s annual production has accelerated from well under 200% to almost 400%. Government’s promise to initiate new programs means that this trend cannot fall but will accelerate. Therefore, we must conclude that the dollar will collapse.

The Only Way to Prevent Collapse

There is only one way to avert total collapse of the dollar—cut government spending and end the dollar’s debasement. The former must precede the latter, because, as Professor Polleit explains, government will not default (technically) on its debt as will private companies. The government will repay its debt in a technical sense only--by paying debtors in debased dollars. But debasement will lead to the collapse of the division of labor society and bring economic chaos on the 1923 German model, which wiped out the middle class and created the psychological conditions for the rise of the national socialist (Nazi) totalitarian state.

Therefore, the only path open to averting collapse is the abolition of government programs and cabinet level departments whose insatiable appetite for spending drives government debt. Government wealth transfer programs are not debt obligations of government. No one holds Social Security debt as one would hold a corporate bond or even a government bond. The Social Security program is just a spending program and may be ended in an instant. This we must do before spending on Social Security, Medicare, Medicaid, the Prescription Drug program, and the new healthcare mandates drive the debt burden to the tipping point. Ending these programs is not the same as defaulting on government debt. It is simply ending tyranny, for it is only the coercive intervention of government that sustains them.

Workforce Deregulation Will Open Job Opportunities for All

At the same time, government must completely eliminate all regulation of the economy, especially the workforce. People who have retired on Social Security and can still add something to the economy must be allowed to do so. Those who have yet to retire on Social Security must be given as much time as possible to plan for a retirement without Social Security. Abandoning all coercive wealth transfers and prohibitions against willing labor, such as minimum wage laws, will reduce the cost of labor and restore full employment. Reducing all the regulatory burdens of government will increase the sanctity of property rights, spur capital accumulation, and cause prices to fall. All this will go a long way toward mitigating the pain that will be suffered by those who currently depend upon government's coercive transfers of wealth in their favor. Once government has slashed its spending on other worthless programs--such as those sponsored by almost all cabinet level bureaucracies other than defense, state, and treasury--it can abolish the Fed and convert the dollar to a private, commodity backed currency, which will prevent government from ever again embarking on such a spending binge. A commodity backed money immediately reveals the true cost of any government expenditure and illustrates for the people the unassailable fact that all government is a burden on the people and not some sort of economic stimulus. At this point the government’s role in the economy will be that as envisioned by our Founding Fathers, as policeman for protecting us against fraud, theft, and coercion. Once again government will be our servant and not our master.

The Ethics of Compulsion

A controversial element of the Obama healthcare reform plan is its “public option “ clause, whereby those without health insurance would be enrolled in the government’s subsidized package. Opposition has come mainly from free market advocates who fear that a government plan would underprice private insurance and eventually lead to the demise of private health insurance and, with it, their ability to choose their own doctors, treatments, etc.

Apparently there is less opposition to more coercive government measures to force private insurers to accept those with pre-existing health problems, to price the same for all categories of risk (such as age, sex, and lifestyle), and the mandatory inclusion of politically motivated procedures, such as sex-change operations.

I regret to say that I am certain that something will pass and that eventually the government will take total control of healthcare in America. The same dynamic existed for government programs that now are completely out of control, such as Medicare, Medicaid, Food Stamps, Social Security, and other welfare programs. Once a foothold has been gained, there is an irresistible pressure to extend the benefits to the next tier of potential beneficiaries.

The reason that these welfare programs gain a foothold in the first place is that the electorate has too little concern over their loss of freedom and no understanding of the philosophical basis for advocating the protection of their freedoms. But all such programs fail the freedom test.

The Source of Our Freedom

Frederic Bastiat explained it best in his 1850 book The Law, in which he explained the foundation of man’s freedom and the logical implications for limiting the power of the state. Bastiat repeated the widely held (at that time) understanding that man (and woman, of course) is created in the image of God. And Bastiat meant each and every individual man, not some collective of “men” as an aggregate group. He explained that this is a logical conclusion and not exclusively a religious conviction. For one would come to the same conclusion about man’s relationship to the state even if he were an atheist.

Bastiat explained that man’s relationship to other men must fall into one of three categories and that only one of those categories was compatible with man as a rational being. One, man owns himself. Two, some men own other men. Or, three, everyone owns everyone else. The third option is impossible, for if everyone owned everyone else, we all would have to poll everyone else on the planet in order to do anything at all. This is impossible. The second option is the case of slavery, which we may dismiss without belaboring the issue of the impossibility of any ethical determination of how some become masters and the rest become slaves. Therefore, we are left with the first option, which is completely compatible with both religious convictions and secular reality.

Next Bastiat explained that man’s ownership over himself places natural limits on his actions. Most importantly man could do anything he chose, but only as long as he granted all other men the same natural right and as long as he harmed no other men in the exercise of his right. This leads to man’s innate right of self-protection. The only legitimate use of force is that which is required to protect oneself from the coercion and/or harm of others. All other use of force is illegal. But man soon saw that he was limited in his ability to protect himself and saw cooperation with other men as the solution. Thus was born society (or the state) as an artificial, man-made institution formed among cooperating individuals to more perfectly secure their natural rights of life, liberty, and property.

The Limits of State Action

The state, as a creation of man, cannot possess any rightful powers that do not come from man. Since man can delegate only his rightful power to self-protection, the state can lawfully exercise only this power and no more. Furthermore, since the state is a product of man, it is not an institution with any rights that are not rightfully man’s in the absence of the state. Therefore, there is no conflict at all between the free, harmless exercise of man’s rights as an individual and the state’s legitimate exercise of those delegated rights. Since there can be no conflict, any action of the state to interfere with man’s exercise of his harmless rights is unlawful. Thus, The Law, in all its majesty and rightly understood, flows from man’s inalienable rights for the better securing of his life, liberty, and property.

Absent from this irrefutable, logical understanding of man’s relationship to the state is the right of the state to force man to do something that man, as an individual, could not do legally himself. Therefore, since man, as an individual, cannot force his fellow men to behave in certain ways or contribute their wealth for the benefit of others, the state itself exercises no lawful right to do so.

All of this is embedded deeply in America’s Declaration of Independence and codified into law via our magnificent Constitution. These documents of our nation’s founding are all that the common man needs in order to evaluate for himself when the state has overstepped its bounds and has become a tyrant rather than his servant. Nowhere in either document can be found the right of the state to force one man to be another’s keeper or even to force men to adopt behaviors “for their own good”, such as cessation from smoking, gambling, drinking, etc. No single man has this power and, therefore, it is impossible for the state ever to get this power legally. It can exercise this power only illegally, its beguiling sophistry to the contrary.

Thusly may we evaluate the Obama administration’s healthcare proposals—or any other governmental proposal, for that matter--from an ethical and legal standpoint. Since I may not legally force my fellow man to stop smoking, when it does no harm to me or anyone else, the state has no right to do so either. Furthermore, since I may not force my fellow man to pay for my healthcare or anyone else’s, the state may not do so. Utilitarian arguments over the shame that many in our society do not possess healthcare insurance--or any other desirable good, such as food or housing—carry no legal right to force us to provide such healthcare or any other necessity of life. Furthermore, utilitarian arguments—legitimate, in my opinion—over the likely adverse consequences of the socialization of healthcare, are irrelevant to the proposal in a free society. Those who call for such measures are willing to abandon freedom and turn their backs on the natural rights of their fellow man. In my opinion this is a monstrously tyrannical ethical position and, therefore, we need discuss the socialization of healthcare no further.

Is This the Start of the Gen X Revolt?

Just like the weather, everybody talks about the unfunded liabilities of the Social Security, Medicare, and Medicaid entitlements but no one does anything about them. That may be changing. Last summer, the Americans for Generational Equity (AGE) held its first Youth Entitlement Summit (YES) in Washington, D.C. Another will be held sometime again in June of this year. It brought together a bipartisan group of mostly young people who KNOW that the current entitlement system will impose unbearable costs on them. They also KNOW that they had no say in creating these entitlements. Isn’t that called taxation without representation? It looks like they are determined to right this injustice that is about to descend upon them. For there is one thing that is certain — it does not matter whether you wish these entitlements to continue or not, the giant Baby Boom Generation’s claim upon the production of the following generations is too great for them to endure.

Last fall, I met a young vice president of this organization and have been in intermittent contact with him ever since. I have been amazed and thrilled to meet someone of his young age who sees so clearly the financial disaster to which we are headed and is determined to do something about it. Thierry Dongala is a name to remember. You will hear from him in the future.

The Web site of the YES organization is interesting in many ways. (www.age-usa.org) On the one hand, it reaches out in a friendly way for all to join in this discussion. Surprisingly, many older politicos from both sides of the aisle have joined. I do not claim to know the purpose for which many have joined, but the mere fact that they feel it is important to have their voices heard offers a glimmer of hope. Perhaps sober minds have noticed that the youth of America are getting politically organized in order to defend themselves. But underlying this friendly offer for all to join the chorus is a clear and forceful statement that something must be done to remove the cloud of massive tax increases from the future of our children and grandchildren.

Even if the YES movement fails to gain traction, as they say in Washington, D.C., I am convinced that other like organizations will spring up in its place. The reason is that the train wreck of multi-trillion dollar unfunded liabilities cannot be ignored when the government starts writing the checks. Then the issue will be front and center and our options will be both limited and unpleasant. Better to face them now and build a coalition that can head off disaster. That is the message of YES and that is the truly statesmen-like approach. Work first to educate and then build a coalition to take action.

If entitlement reform fails, the consequences are bleak indeed. Our prosperity will be swamped by the cost of entitlements that the Baby Boom generation insists the following generations must pay. They will toil for less and less; capital accumulation will stop; our standard of living will decline. But that is not the worst of the many disastrous consequences. Read on.

Social Security — A Transfer Program Disguised As An Investment

Social Security is bad enough. A giant, coercive, government run Ponzi scheme, it absorbs 12 percent of our pre-tax income and transfers this spending to seniors, the disabled, widows and orphans. But at least it doesn’t regulate how the money will be spent. Medicare is a different story.

Medicare — A Transfer AND Regulatory Program

Medicare is slowly destroying the American health-care system, and should President Obama succeed in passing universal health care, that process will accelerate. The lesson from Medicare, plus the experience of our neighbor to the north and the European countries gives us a glimpse into the future. Health care will cease to be a service like any other, based upon capitalist principles. Instead it will become a command and control service in which the government makes all the decisions, even whether we will live or die. The reason is that state run health care systems, far from being "free," cost much more for the service actually delivered than the private systems they replaced. Higher costs lead first to deterioration in service quality and then, inexorably, to a reduction in health- care access. This will be the case even for those who are supposed to be the primary beneficiaries of a state run system — those currently without health insurance — who are characterized as lacking access to health care now.

Because costs accelerate following the demise of the private system, governments with universal health care systems are forced to ration care. In America, due to exploding cost, Medicare arbitrarily reimburses health care providers — doctors, hospitals, clinics, etc. — only a fraction of the cost of the care they provide. As a result, emergency rooms, trauma centers and even hospitals have been forced out of business when the percentage of Medicare patients reaches the point that revenue from other payers can no longer subsidize them. So our experience with Medicare plus the experience of the countries currently offering universal health care leads us to the obvious conclusion that less, not more, health care service will be available under a universal health care system. Even if America does not adopt such a system, the Medicare system will cause close to the same result but at a somewhat slower pace. Of course, before this happens, Medicare taxes will be raised in a futile effort to balance the books, leading to more generational injustice that is the concern of Mr. Dongala’s group.

I do not know whether it is possible to "save" either Social Security or Medicare. It is possible that the nation would accept a continuation of the current tax level and a decline in Social Security and Medicare benefits. (The Social Security Administration itself says that benefits will have to be reduced to approximately three-fourths of the amounts currently provided unless taxes are raised.) Medicare probably is beyond saving as currently structured. It is possible to conceive of scenarios in which health care providers would be allowed to refuse treatment to Medicare recipients who did not have supplemental insurance, for example, but accept Medicare recipients who did. Or both programs could become pure welfare programs, denying benefits of any kind to retirees with private incomes and some means. My prediction is that, even if this came to pass, fraudulent claims would swamp both systems as retirees who paid these taxes all their working lives saw services going primarily to the irresponsible. They would hide income and wealth in order to qualify. Such a system would make nominal criminals out of thousands, perhaps millions, of honest people.

Before this happens, let us try to do something about it. The first step is to determine what is politically possible. Forums such as Mr. Dongala’s Youth Entitlement Summit are a good first step and, according to an old Chinese proverb, a journey of a thousand miles begins with a single step.