Fatal Flaw of Democracies

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“We just can’t afford it!”

Not long ago, every America child heard that, at one time or another, in the home in which he or she was raised.

“We just can’t afford it!” It may have been a new car, or two weeks at the beach, or the new flat-panel TV screen.

Every family knew there were times you had to do without. Every father and mother has had to disappoint their kids with those words. Why is it that what parents do many times a year politicians seem incapable of doing: saying no.

How many times in the last decade have the political leaders of either party stood up and declared, “No, we cannot afford this.”

Consider. Friday, the White House conceded that the deficits over the next 10 years will total $2 trillion more than they had reported just months ago. Instead of $7.1 trillion, we will run $9 trillion in deficits.

Meanwhile, the White House demands a new entitlement—health care coverage for 47 million uninsured who can’t afford it or refuse to buy it—that will cost at least $1 trillion over 10 years. Can we afford this—now?

“We can’t afford not to,” comes the retort. This is “a core ethical and moral obligation,” says Barack Obama.

But is it not a core ethical and moral obligation not to debauch the currency in which most of the hard-earned wealth of the American people is invested? Yet, as Warren Buffett writes in the New York Times, collapse of the dollar and the end of its days as the world’s reserve currency is what we are risking.

Government expenditures are running at 185 percent of revenue, which is like the lone family breadwinner earning $50,000 a year, while the family spends $92,500 a year. With families that do that, it is not too long before the credit cards are cut off, the mortgage is called in and the family Chevy is repossessed.

According to those same White House figures, this year’s deficit will be closer to $1.6 trillion than the $1.8 trillion previously projected. Now, there are only three basic ways to finance that deficit.

The first is by borrowing the savings of one’s own citizens, thus consuming the seed corn of the private economy. The second is by borrowing from abroad. The third is by having the Fed, “through a roundabout process,” writes Buffett, “printing money.”

Assume the Treasury borrows most of the savings of the American people this year, say, $500 billion. Then Uncle Sam is able to persuade Beijing to buy another $500 billion in Treasury bonds. The Fed must still run the printing presses to create another $600 billion.

How long before our Chinese, Japanese and OPEC creditors conclude that the Americans are depreciating their currency, and dump their U.S. Treasury bonds, or demand a higher rate of interest to cover the risks of their dollar-denominated assets sinking in value?

Can anyone believe the dollar can even retain its present diminished purchasing power if we run $9 trillion in deficits over 10 years? How long before producers conclude the same and start to demand more dollars for their goods—and inflation takes off?

As Buffett argues, even when the U.S. economy returns to full employment, the new tax revenue it would throw off cannot close a deficit of that size. One must either slash spending or raise taxes to balance a budget where the feds are spending a fourth of gross domestic product.

But how do we cut spending when the five largest items in the budget—Social Security, Medicare, Medicaid, interest on the debt and national defense—are untouchables and growing faster then the 3 percent to 4 percent a year a full-employment economy can manage?

Are we going to cut veterans benefits, spending on our crumbling infrastructure or education, when Obama is promising every kid a college degree? Are we going to cut funds for Afghanistan and Iraq, and risk losing both wars? Are we going to cut foreign aid after Hillary Clinton has been touring Africa telling one and all America is here to stay?

How about cutting funds for food stamps and the Earned Income Tax Credit? Good luck. How about PBS and the National Endowment for the Arts? Just try it.

Does either party have any plan to cut federal spending from today’s near 28 percent of GDP to the more traditional 21 percent?

George W. Bush didn’t even try, and Obama is making that Great Society Republican president look like Ron Paul.

When a democracy reaches a point where the politicians cannot say no to the people, and both parties are competing for votes by promising even more spending or even lower taxes, or both, the experiment is about over.

“Remember,” said John Adams, “democracy never lasts long. It soon wastes, exhausts and murders itself. There never was a democracy yet that did not commit suicide.”

COPYRIGHT 2009 CREATORS.COM

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