Thursday, November 24, 2011

End of the World as We Know It?

Back in the 1980s I had a friend named Chuck, who was convinced that the corrupt, illegitimate capitalist system would inevitably and certainly collapse under its own squalid weight by the end of the 20th century.

I never was quite convinced that Chuck was right, but he spooked me enough that I stayed well away from the stock market during that decade, thereby missing many opportunities to make a lot of money. I did my best not to make the same mistake in the 1990s.

Although Chuck’s prediction did not come true by the end of the 20th century, one might well wonder if it might not be coming true now, belatedly. In the United States, the budget deficit is on a track for disaster, and the government seems incapable of doing anything to correct things. Unemployment is stuck at a high level, and protestors have ensconced themselves in many urban centers to protest income inequality. In the European Union, the inability of a number of countries to get their books in order looks as though it may eventually bring down the economy of the whole continent. Even an economy as solid as Germany’s looks as though it could conceivably be brought down by its interconnectedness with its neighbors.

So is this it? Is the whole system going to come crashing down? If so, will it lead to a socialist utopia run by Chuck and his brethren? Or will it lead to a breakdown in civilization, as we have seen in movies like The Road Warrior? I cannot claim to have any particular insight, but my gut tells me that we are not at the dawn of a new glorious socialist age, but there are quite likely to be major, disruptive political and economic changes in our lives in the near to mid-term. The U.S. and E.U. are both getting to the point where things will either inevitably fall apart or radical changes in government policy will be instituted. Both places face looming binary choices.

The E.U.’s choice is between 1) dismantling the euro zone by kicking the weaker countries out or abandoning the euro altogether and 2) accelerate political integration so that most countries surrender all meaningful national sovereignty to Berlin and Paris. The U.S.’s choice, ironically, is to 1) move more in the direction of the current European model, which as we can see is working really great, or 2) attempt to seriously prune the size of the federal government. In other words, both places have been on journeys that have gotten them to a bad place. Now their choice is to move forward or to move backward.

In the American case, moving “forward” might look like this. Confiscatory taxes would attempt to narrow the deficit and shrink the income gap that the Occupy Wall Street crowds are protesting. These taxes would affect only the top earners because the government will have voter support only if most people continue to pay low or no taxes. This will ensure that unemployment stays high, so the government will try to manage a permanent low-growth economy by providing job security for a majority but with no prospects for ever having jobs for a minority. Given that even confiscatory taxes will not erase the defict, inflation will become a permanent fixture, as the Federal Reserve has no choice but to monetize the debt.

Moving “backward” would inevitably involve much pain in the short term, as large numbers of public employees are laid off and the social safety net shrinks. But past experience suggests that eventually a robust economy would return, as more of the nation’s wealth is released from the government and put to work by the private sector. Eventually, unemployment would drop to more acceptable levels.

I honestly don’t know which way Europe is going to go. In the end, the decision will probably be made by German voters, who have to be getting fed up seeing their own economy put at risk by factors beyond their country’s control.

Likewise, the U.S.’s direction will certainly be determined by next year’s election. If the Republicans win the White House and majorities in Congress, we can expect the sort of rolling back that has happened in Wisconsin and was attempted in Ohio. If the Democrats—against all odds—win big, it’s hard to know what will happen. It’s difficult to imagine even a reelected President Obama and Speaker Pelosi moving the country further to the left in the face of the Democratic Party’s moderate faction, let alone Republican obstructionism. And those two have already demonstrated that they are incapable stewards of the American economy. The worst possible outcome will be a mixed result with continued split government and more gridlock.

The hard fact is that we are left in the position of no realistic hope for a good outcome. All we can do is hope for the least bad outcome. Otherwise, Chuck’s vision of the future may yet come to pass.

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