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The Collectivist Economy

12/18/2008

By Matthew Jarosinski

As the U.S. is rapidly sliding into depression there's intense debate how to keep the economy from collapsing. At the center of the problem is the enormous debt. Excessive debt has been known for creating huge economic problems. Prior to the Great Depression debt/GDP ratio was very high.

In the "Thoughts on the financial crisis" Wavell Cowan (The Valley Reporter of 12/11/08) reflects on a fractional reserve system and the fact that liquidity shortage started the Great Depression. Keynes was able to show why the economy had declined and how government deficit spending could bring prompt recovery. Today the U.S. is again deeply in debt and it requires Keynesian liquidity shock treatment.

The U.S. government guaranteed about $8 trillion to financial firms. To finance the banks the Fed is printing money and Treasury increases the deficit. Yet, the liquidity shortages persist. There is a need for further liquidity infusions in order to save the system and hence the economy. The nation is going for broke but there is no alternative. Will government succeed in containing the financial crises related to consumer debt, national debt and the Wall Street debt? The problem is that the current debt is so vast that it is far beyond the power of the government to resolve. Individual consumption in the U.S. is 71 percent of economic activity and only strong consumer, not a government, can rescue the economy.

Sadly, consumer is also deeply in debt. It almost seems that the real causes of the debt creation cannot be addressed and therefore some economists, like Nouriel Roubini, predict the decline of America. The others use the Great Depression to promote the view that free market is inherently unstable and left alone it will produce severe indebtedness. The state must restore the equilibrium. In the long run they would like to see a full transition from market economy to collectivist economy. In fact the Great Depression was caused by the government and not by the market. It lasted much too long because the New Deal produced the major impediment to economic growth. For market equilibrium as well as for economic growth we badly need the reduction of government participation in economy, not an increase. Still the government has a crucial role to play in financial markets by providing stable monetary, regulatory and legal networks.

We can look briefly at the local example of debt creation. The government of Waitsfield is going to construct an expensive municipal water system. The $ 7.6 million bond will increase the debt at the time when the nation is struggling to reduce the general indebtedness. According to the data obtained from Stowe, a similar system constructed several years ago in Stowe was much cheaper. I can imagine that it is entirely possible to build such a system without a government, at a lower cost. The residents approved, albeit narrowly, the municipal option because the tax exposure was masked by the use of the titles, by the officials, like, "The project will not increase your property taxes."  Nevertheless, if the town adds the existing municipal facilities and the school, even though these facilities have now their own water systems, the taxpayer cost will go up. I am entirely convinced that the town is doing its best to help the welfare of the residents, but I think that if this job were carried out by a private sector the fiscal outcome could be improved. The recession is now running on all six cylinders and individuals cannot borrow and layoffs and unemployment continue to mount.

Similar problems of inflated cost and unnecessary spending arise because of the role of government in education and in health care. The government produces bubbles, which contribute to the liquidity shortage and to the unsustainable growth of debt by increasing the cost of living and the cost of doing business. It is not feasible to make the government compensate the consumer -- the government makes any voluntary exchange, service and profitable production impossible. It changes the free market environment and the criteria relevant for business success.

Today the government spending in the United States -- federal, state and municipal -- exceeds now 45 percent of national income because people believe that government can efficiently manage their economic affairs. We needlessly intensify and enlarge state sector in the economy. Yet, collectivism seems compassionate because it stresses the importance of urgently responding to human needs. In fact it is little more than a rationalization for stacking massive burdens on individuals in the pursuit of some impossible dreams, often well intended, of a narrow yet influential group. It is tactic for surrendering the common good.

Public regard for individual continues today. But it had become a social routine, without influence on goals of living. Today individual feels itself a cipher. There is the sense of need for powerful partner in economic affairs -- for collective and for government. We are thus having expansion of a costly and wasteful collectivist segment of the economy. Even if our society will finally perceive the problem, the solution might be beyond our diminishing capacity to solve the crisis. 

Matthew Jarosinski lives in Waitsfield.

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