Larry Summers wrote a piece to The Washington Post and Financial Times that made me ROTFL:
Government we can't afford (full text, free, titles differ)See also a response in The National Post which only reviews the article and says "a dramatic change is what the Tea Party wants".
Summers says that no matter who wins in the U.S. presidential elections, America's public sector will continue to increase as the fraction of the GDP.
This man wasn't sufficiently left-wing for Harvard; I can't believe what I apparently remember about the politics at Harvard, it sounds completely insane to me today.
His arguments why the growth of the government shouldn't even be wrestled with stands on four legs:
- A third of the federal budget pays for people above 65 years whose fraction will go up
- Interest rates and the interests from the debt will go up
- Although products get cheaper, services paid by the state are getting more expensive
- Suspension of investments into infrastructure isn't sustainable in the long run
There's of course an alternative solution Summers doesn't even dare to contemplate: to spank this spoiled brat and stop buying him gummi bears (or at least reduce them). It's kind of incredible that this apparently bright guy can't get this basic point. There is nothing desirable or healthy about the spoiled brat's body to contain an increasing percentage of fat – much like there is nothing healthy or tolerable about a big government that devours a large and growing portion of the GDP.
But the undesirable trends won't stop automatically; someone must actually push them in the right direction. If we return to Summers' four points, they are four symptoms of the spoiled fat brat's high body mass index. Each of them actually has to be fought against.
Retirement age
A large and increasing percentage of the population is 65 years old or older. The primary reason is of course the increasing life expectancy which is actually a good thing, a result of healthier environments, less crippling jobs, and better and improving healthcare. But one must first appreciate that this trend is actually a good one. What does it mean to appreciate it? It means to publicly admit that as people are living longer, they are obviously also able to work longer. And to actually imprint this important finding into the policymaking.
The Czech Republic was the most socialized country of the Soviet bloc but there's no tangible opposition in my homeland to the trivial concept that the age at which people retire obviously has to gradually go up to solve the Summers' problem number 1. It's been agreed that the threshold to retire will soon reach 70 years; if I manage to live that long, it will probably be much higher than that for me. No one protests, perhaps with the exception of a few loons who are considered loons even by the unreformed Communist Party. It's completely obvious to everybody that a longer life is a proof that one is also capable of working longer. The percentage of the people who are expected to work can't be allowed to drop to arbitrarily low levels simply because the nation wouldn't feed itself and everyone is able to see this elementary point.
Summers' point 1 is therefore based on the implicit assumption that it must be a blasphemy to even suggest that the retirement could be postponed as people are getting healthier and more long-lived. Of course, once we are free at least to suggest, we know that the point 1 as a justification for a growing government is a complete fabrication. There doesn't exist any problem 1. The rules must be such that the percentage of the "productive population" simply never gets too low, it's kept in a healthy interval, and it's always possible to do so. If people were kept alive for too long but they wouldn't be able to live fully for a constant or increasing fraction of their lives, it would be a proof that it is counterproductive to keep them alive this long because they actually don't enjoy their life or mostly suffer for too long. If this were the case, the right response designed to make the people happier in average would be to shrink the budget for Medicare. If we decide it's not the case, it gives the policymakers a logical, waterproof justification to raise the retirement age.
At any rate, the fact that people are obviously getting healthier – as manifested by the increasing life expectancy – can't possibly be making the fiscal situation of a nation worse, can it?
Interest rates
Summers' decision to include the demagogic reference to the interest rates is an example of what the Jews call "chutzpah". He is using the expected rise of the interest rates as a justification of a growing government. Interestingly enough, just a year ago or so, he would use the low interest rates as a justification of policies to increase the government (and the debt ceiling), too. He would be saying that the interest rates were really low so no one needed to care about them and the government shouldn't be afraid to borrow ever higher amounts of money because things are OK.
Now, when it seems as though the era of cheap money is coming to its end anyway, he is using exactly the opposite observation to justify... the same policies to grow the fat spoiled brat known as the government, too. Why is he including all the irrelevant detailed numbers in his articles, pretending that they are arguments in favor of something, when it must be damn obvious to him that the true reason why he will advocate an ever bigger government is that he simply wants it, so he wants everyone else to believe that everything else must adapt to the "boundary conditions" that include the "fact" that the government has to be increasingly big? It's what I call demagogy.
It's also demagogy for him to say:
But for the next three decades the United States will confront the reality that major structural changes in its economy will compel an increase in the public sector’s fraction of the total economy unless the functions that the federal government has long performed are substantially scaled down.The most inclusive, objective method to quantify "how many functions" the government is performing is to count the overall public expenses as a percentage of the GDP (I am sure that Summers would agree that the GDP is the most inclusive measure of the economic activity and I add it's a hypocrisy if he disagreed that the total public expenses don't analogously measure the total "amount of functions" that the public sector plays). If this percentage is growing, it proves that the government is performing an increasing number of "functions"; in that case, it's just copulating growing, isn't it? So Summers' proposition that the public budget fraction of the GDP has grow for the "number of functions performed by the government" to be fixed is tautologically false.
The true explanation is that politicians always have some power over the question how big the government is. They may invent various more or less silly or demagogic excuses for one kind of a decision or another. But it's their acts, their decisions about the budget and entitlements etc., that actually express the relevant information about the values. And make no doubts about it, if a government grows too big, the country in which it governs collapses or becomes unproductive. That's what happened – and is still happening – in Greece. That's what previously happened to the Roman Empire. That's what happened to many socialist countries. This key dynamics, namely commitments and entitlements increasing above a threshold that the nation may afford while staying productive and "in black numbers" – and not some flapdoodle about the climate or the environment – is the primary mechanism that makes empires, civilizations, and countries collapse.
So one may perhaps adopt some "Keynesian bias" and increase the spending when the commercial sector tends to do the opposite, i.e. when the private sector economy displays signs of a downturn. But this bias must still be used consistently. If the commercial sector starts to grow, the government must shrink itself again. If it loses the will or ability to move in both directions when needed, and it can only grow, then the government becomes the body fat that is gradually and irreversibly converting the whole organism into a fat pig that must be butchered because it's the only thing that can really be done with it. If (not only) Summers' fiscal philosophy remains unchallenged, Butchers China et al. Ltd. will perform this operation with the Pig America Unltd. in decades from now – and America will badly deserve it.
Again, the rising interest rates are a sign that the government has borrowed too much and they're also a natural, healthy, self-regulating negative feedback mechanism that is trying to "punish" the government for having spent so much and discourage it from continuing in this behavior. If you imagined an individual instead of the government, his reaction to rising interest rates would be obvious: he would stop borrowing too much simply because borrowing has gotten too expensive and he is afraid that the excessive debt and high interests will be crippling his future, or he may go bankrupt. That's one of the many ways in which the invisible hand of the free markets restores the balance. For a government to work properly, it must feel exactly the same things as the individual and it must respond analogously, too. If a government continues to spend like mad despite the fact that the interest rates are rising – note that the apparatchiks in the government don't care "personally" because it's not really their money so it's easy for them not to react in this proper way – it's leading the country it governs into hell.
At any rate, rising interest rates can't possibly be an excuse to increase the size of the government. Quite on the contrary, they're a warning, a pressure that must convince every rational government to reduce the expenses.
Increasingly expensive services provided for free
The third reason that Summers cites as "evidence" that the government has to be getting bigger as a fraction of the GDP is that the services that the government pays for its numerous citizens are getting increasingly more expensive. Again, Summers is describing another symptom – accumulating body fat in another part of the body – but he doesn't even dare to admit that the underlying problem could be or should be wrestled with.
The government is promising the citizens an increasing number of things for free (and an increasing fraction of them isn't really needed or wanted by many recipients) even though it can't really afford it. It's wrong and the government must stop doing these things or at least stop increase the number of these things. It's simple.
But we may also analyze the situation from the opposite side. We may ask: Why is the price of services such as education and healthcare growing more quickly than the price of products which is actually decreasing in most cases? It's simple. People employed in education and healthcare are seeing an increasing demand – because the government keeps on growing and is prescribing an ever greater amount of (often useless or counterproductive) education, healthcare, and other things. And if the demand is growing, of course that the people doing these things may expect an ever greater compensation.
What Summers' point 3 actually shows is another proof that the government has been growing; as well as a proof that the government works less efficiently than the private sector because it doesn't "spontaneously" lead to the decrease of prices of the products and services. Of course that it doesn't because it lacks the competition and other key mechanisms that make the capitalist societies work – and that make them work ever more efficiently.
So instead of considering the growing price of education and healthcare services to be a parameter that helps us to decide whether the government should grow, we should really view these observations as symptoms of the fact that the government has grown and continues to grow in an unhealthy direction. So these are just additional reasons to actively shrink the government. When one actively shrinks the government, i.e. reduces the amount of mandatory education and brainwashing and inspections that everyone has to undergo, the effect on the public budget will be kind of doubled. Not only some of the expenses disappear because they were simply scratched from the list of expenses; but even the remaining ones that weren't scratched will become cheaper, so this will serve as another source of savings. Another, third improvement will boil down to the fact that more work will be performed in a more efficient (private) sector that, as Summers admitted, is more capable of increasing the efficiency and lowering the prices.
At any rate, the number of expenses and projects and mandatory standards, regulations, inspections, verifications, interventions etc. has to be actively reduced. If it is not being reduced, the government will continue to grow, including some positive feedbacks, but what Summers actually shows are just the feedbacks that may work in both directions – either to inflate the government or make it more efficient. The actual sign of the future trend isn't determined and the only way how Summers got a "plus sign" (the government will grow) is that he assumed it. He assumed it that the future politicians will be as blind devotees to the big-government paradigm as himself.
Infrastructure
It's obvious that it's often better to make an investment and use e.g. good highways for many years than to suffer for years. However, not all investments are good investments. What's sick about the government as a concept is that it never carefully evaluates whether some investments were good ones – or at least it never stops the "same kind of investment" that has been shown to be a waste of money.
So there are highways that are built (or huge scientific experiments, or whatever) and they're simply too expensive relatively to what they bring to the society. They shouldn't be paid for by a rational government because they wouldn't be paid by a rational rich individual, either. Such things have to be traced. The government must be able to critically look at its own spending. Of course, the most natural way for a country to create this "feedback" is to leave a maximum amount of these things to the private sector, to privatize; the public sector is just intrinsically bad at all these things and self-appraisals. An investor may build a road and think about a way to fund it by the users of the road. If the project isn't profitable, it probably won't be realized, and that's how it should be.
To summarize, Summers' text is completely invalid as "evidence" or "justification" of an ever growing government because the desired conclusion has been assumed from scratch. It was assumed because Summers promoted all the good steps that must be done – increases of the retirement age, reductions of pensions, reductions of many kinds of entitlements, regulations, interventions, inspections, reeducations, brainwashing, etc. etc. etc. – to taboos that can't even be considered.
It's probably true that Barack Obama and people around him are worshiping the same dogma of an ever greater government and that the judgement day – the butchery by China et al. Ltd. – is inevitable within a few decades with similar Obamas standing in front of the steering wheel. But it may be a good idea to wait and see whether Mitt Romney is really another copy of Obama in this respect. Especially after he chose Paul Ryan as the running mate, responsible Americans have a new reason for some optimism.
And that's the memo.
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