The further to the left or the right you move, the more your lens on life distorts.

Wednesday, May 16, 2012

Peak Government

For at least two decades environmentalists have talked about "peak oil"—"the point in time when the maximum rate of petroleum extraction is reached, after which the rate of production is expected to enter terminal decline." (Wikipedia). Based on discoveries of new sources of oil, it appears that we have yet to reach the peak, but there is another peak that no discovery will postpone. Tyler Durden suggests that we are at the time of "peak government:"
... It’s not about government disappearing, it’s about government shrinking.

Central government -- the Central State -- has been in the expansion mode for so long that the process of contracting government is completely alien to the nation, to those who work for the State, and to those who are dependent on the State. Thus we have little recent historical experience of Peak Government and few if any conceptual guideposts to help us understand this contraction.

Peak Government is not a reflection of government services or the millions of individuals who work in government; it is a reflection of four key systemic forces that drove State expansion are now either declining or reversing.
The four "systemic forces" that Durden identifies are: cheap abundant petroleum-based energy, increasing numbers of working age citizens, "debt, leverage and institutionalized incentives for speculation," and "the State’s ontological imperative to expand. The State has only one mode of being, expansion. It has no concept of, or mechanisms for, contraction."

The debt crises facing the EU and the United States are in no small part tied to changes in all four of these systemic forces. Energy costs have risen dramatically, retarding the rapid expansion of industry that leads to employment and higher tax revenues. The number of working age citizens is contracting, and worse, the number of retirees is expanding dramatically, causing enormous stress on government budgets. In addition, public sector pensions, negotiated without regard to their long-term liability, have become a financial monster that cannot be easily tamed. Debt has become so large, and the rate of increase in debt under President Obama has become so significant, that servicing the debt will soon absorb significant percentages of the federal budget.

As the state grows larger, it begins to control larger and larger swathes of the economy (e.g., Obamacare will indirectly control 1/6th of the U.S economy). But as control expands, the state must transfer risk to others. Durden comments:
Put another way, once the State controls the entire economy and society, it can transfer systemic risk to others: to other nations, to taxpayers, etc.

In effect, the State’s prime directive is to cut the causal connection between risk and gain so that the State can retain the gain and transfer the risk to others. The separation of risk from gain is called moral hazard, and the key characteristic of moral hazard can be stated very simply: People who are exposed to risk and consequence act very differently than those who are not exposed to risk and consequence.

Every time the Central State guarantees something, it disconnects risk from consequence and institutionalizes moral hazard.

To take but one example of many, when the Central State guarantees mortgages so lenders and originators cannot lose and the borrower can’t lose more than his modest 3% down payment, then everyone in the chain is encouraged to pursue risky speculations because the State has disconnected risk from the consequence of a potentially large loss. The risk hasn’t vanished; it has simply been transferred to the taxpayers, who absorb the inevitable losses that result when speculation is encouraged.

Separating risk from gain inevitably generates systemic instability. The entire credit-housing bubble can be seen as proof of this dynamic.
The "instability" that Durden predicts is already here. The problem is that the country's current leadership doesn't have a clue why things aren't improving, why the economy is in the tank, why joblessness is distressingly high, why the mood is so poor. To Barack Obama and his ideological brethren, the solution is an expanding government, even though it will increase the instability and decrease the possibility of a recovery. A "contracting government is completely alien" to their world view. Although they rush to embrace "peak oil," they don't even understand "peak government." That's why the upcoming election is so important.