The government that governs best

We’re still in the lazy days of August, with little going on in the stock market. So, let’s use this time to look at deeper trends.

We left off last week with discouraging words. First, we noted the US Social Security system is going broke 20 years sooner than forecast. It’s already $15trn in the hole, with a deficit that’s up 300% (mistakenly reported as 400%) in the last five years.

Second, we sympathised with our new dear readers. It must be difficult coming into a conversation that has been going on for so long. Especially when many of the ideas we are talking about are complex and confusing – at least to us!

Many are those who have tried to understand economics and markets in a simple and definitive way. They’ve laid out their diagrams and made their forecasts.

The graveyards and insane asylums are full of them. Because no matter how much you think you grasp, there is always more that gets away from you.

To remind you, we were wondering why the US Social Security system exists. If the government really was the parasitic zombie we think it is, why would it set up a retirement pension system that seems benign, and that now has the support of an overwhelming majority of Americans (especially those over 65)?

Is it possible that a modern, democratic government really is a different institution of, by and for the benefit of the people who are governed? Does it represent real progress in the life of mankind?

The answer we came to on Friday was ‘sort of’.

Civilisation (including the rules and customs we associate with modern, democratic governments) makes possible trade, commerce and entrepreneurship. This allows people to become wealthy. Wealth allows them to build new and better weapons.

Less civilised governments (dictatorships, communist countries, North Korea, Nazi Germany, Cuba) fall behind. Civilisation triumphs, because it pays.

Modern, more-or-less consensual and more-or-less participatory, more-or-less respecting property rights, and more-or-less predictable government seems to have evolved along with an increase in firepower. Firepower costs money. The freer (more civilised) an economy is, the more firepower it can produce.

As Thomas Jefferson, or maybe Henry David Thoreau, observed long ago, “that government is best which governs least”.

Civilised people neither want nor need much government. Instead, it gets in the way. The more they have of it, the less able they are to produce wealth (and firepower).

That leaves little for the bullies, bossies and blowhards to do. So, they turn to ‘Social Security’, and Obamacare, and Homeland Security – programmes that appear to be set up to benefit the ordinary citizen.

Instead of a barbaric institution of naked aggression and force, a government is said to have no further point or purpose but to make citizens’ lives better. That is why we have the Fed.

It is really a cartel of bankers who make sure they protect and defend the right of bankers to make a lot of money. But have you heard Janet Yellen lately? She says she is deeply, deeply concerned about the plight of the unemployed!

Most of the public believes that a modern government is merely a grand insurance programme. It protects them. It defends them. It pays their medical bills. It provides an income during their working lives and a pension for their retirement.

More importantly, it flatters them. It convinces them that they are the real deciders, the captains of a superior civilisation, the citizens of an ‘indispensable nation’ without which the light of the world would be extinguished.

But there is a big flaw in this model. The feds’ insurance business may be backed by firepower, but it is dependent on voter support. The voters want more and more benefits. And they are not too picky about financial standards.

The model works only so long as the economy and credit are both expanding. When those stop growing, the system goes broke.