Thursday, February 13, 2014


People of the world have transformed into gluttons. They are getting fatter and finding themselves more and more in debt. (Part of this may be due to centuries of "scarcity" that have left man hard-wired to accumulate everything he can.) This seems like an individual problem, right?

Well, in Boomerang, Michael Lewis shows that the same problems appear in government. He rights in a fast paced anecdotal narrative style that helps bring home the issue he "accidentally" discovered. Governments themselves are over-leveraging themselves. They are using debt to provide an increasing numbers of services This leaves them susceptible to massive failures.

The book presents case studies of some of the biggest government economic collapses. They seem to have occurred for a number of different reasons, though all seem to come back to the "money for nothing."

The graft bubble: Greece collapsed under a huge volume of debt. It has a huge public sector that is significantly overpaid. People in the private sector (and in general for that matter) feel it is their civic duty to cheat on taxes. Thus income is low, while expenses are ridiculously high. The public sector tends to be very inefficient. (An anecdote is that it would be cheaper to just pay for everybody's taxi fare than to run the Greek railroad.) Workers can also retire early. Is it a wonder this system lasted as long as it did?

The banking bubble: Iceland had a different type of failure. The country was for the most part well run. However, the Icelandic people discovered investment banking. The banking sector sprouted overnight and led to a run up of the currency. People discovered that they could borrow foreign currency and thus get things for cheap as the Icelandic crown appreciated against the foreign currency. Alas, the run up was built on a large number of not-well-researched investments in the banking sector. When the banks collapsed, they brought down the currency with it.

The property bubble: Ireland also had a banking collapse. However, there banks were primarily investing in development of Irish real estate. The loans were given out liberally. Real Estate prices were skyrocketing upwards. Jobs were plentiful and people felt rich. Then they realized that supply outstripped demand. Everything dried up at once. The government stepped in to bailout the banks. And the country continued to inch along.

He also provides cases in the United States. Vallejo California declared bankruptcy. The salaries of police and fireman overwhelmed the budget. (While the workers probably appreciated the generous pay, they also felt disillusioned with the union for taking things to extreme. They would almost rather see a stable city with more officers at slightly less pay.)

Vellejo's problems are symptomatic of California and the United States. Arnold Schwarzenegger was voted in as governor with a mandate to fix California's mess. However, his proposals floundered in the legislature. When he put them directly to the people, they were voted down again. People love getting as many services as possible, but don't want to pay for them. Thus, they have an income tax that depends heavily on high taxes on the very rich. (If the hollywood movie stars and silicon valley billionaires decide to take a hike, the state is pretty much dead.) Employee pensions consume a huge amount of the budget. Generous welfare policies are in place. The state has even been required to spend huge amounts of money to improve the condition of the prisons. (The same prisons where prison guards can make an easy fortune.)

The strange budgeting leaves cities like San Jose with brand new libraries - but no money for books or staff.

The United States itself seems to be living on borrowed time. The government is dysfunctional and debt is piling up. New benefits are being added, but the revenue to support them are lagging. Should the government collapse, a lot of the world economy will go down with it. Could we be in the stage before the new dark ages?

No comments:

Post a Comment