About two weeks ago, while making an important point about the Laffer Curve, here’s what I wrote about the fiscal disaster in Detroit.
Detroit’s problems are the completely predictable result of excessive government. Just as statism explains the problems of Greece. And the problems of California. And the problems of Cyprus. And the problems of Illinois. …Simply stated, as the size and scope of the public sector increased, that created very destructive economic and political dynamics. More and more people got lured into the wagon of government dependency, which puts an ever-increasing burden on a shrinking pool of producers. Meanwhile, organized interest groups such as government bureaucrats used their political muscle to extract absurdly excessive compensation packages, putting an even larger burden of the dwindling supply of taxpayers.
And in this Fox News interview, I elaborate on these arguments and warned that federal government profligacy – if unchecked – will lead to similarly dismal results for the entire United States.
I want to augment on a couple of my points.
First, I explained that Detroit’s bankruptcy won’t have any major and long-lasting ripple effects – assuming politicians on the state or national level don’t encourage more bad policy with bailouts. If you’re a creditor, it’s not good news that the city owes you money, and it’s also not a cheerful time if you’re a retired bureaucrat hoping for years and years of pension payments and healthcare subsidies, but there’s no reason to expect that Detroit’s problems will impose significant damage on Michigan – particularly compared to the harm that would be caused if Detroit was allowed to continue with business as usual.
Similarly, the United States wouldn’t suffer major consequences if (probably when) California no longer can pay its bills. On the other hand, the European Union and the euro currency are being weakened by the mess in Greece, though that’s because they’ve been subsidizing bad fiscal policy with bailouts.
Second, I made the argument for entitlement reform, specifically the “pre-funding” version of Social Security reform that’s been adopted in nations as diverse as Australia and Chile.
Incidentally, this approach is even bolder than the Medicaid and Medicare reforms in the GOP budgets.
Third, I expressed some optimism that the United States has a chance to implement these much-needed reforms, in part because countries such as France and Japan will blow up before America.
And each time another nation, state, or city gets into trouble, it will strengthen our arguments to put the federal government on a long-overdue diet.
Having a strong argument, though, is not the same as having an argument that will prevail. So even though America still has some breathing room, and even though the economic and moral case for spending restraint is very powerful, we’re in the unfortunate situation of having to rely on politicians in Washington.
So keep places such as Australia in mind just in case you need to escape when America’s fiscal chickens come home to roost.
In conclusion, I can’t resist drawing your attention to something I wrote back in 2011, when I showed the eerie similarity of Detroit’s collapse with the “blighted areas” in Ayn Rand’s classic novel, Atlas Shrugged.
