Sunday, November 27, 2011

Does Democracy Still Work in the Age of Entitlements?

Politicians in Europe, Japan and the U.S. seem intent on committing economic suicide.  They are quick to dole out benefits, but won't raise taxes to pay for them. This profligacy has already doomed the Greek economy, and Europe, Japan and the U.S. are barrelling down the path to economic ruin. The international banking system is in danger of collapsing if the value of sovereign debt holdings deteriorate either due to defaults or money printing. If governments decide to solve their budget deficit problems by turning on the printing presses, interest rates will go up, and the value of the sovereign debt held by the banks will plummet. In Europe alone, 20 of the top banks are already teetering on the edge of collapse due to too much exposure to sovereign debt of Portugal, Italy, Ireland, and Greece.

With all the attention focused on the debt crisis in Europe, it is easy to overlook the fact that the U.S. and Japan would be in equally bad shape if not for artificially low interest rates on their sovereign debt. Japan in spending 22% if their federal budget on interest payments, despite the fact that the interest rate on the 10 year note is only 1%. In the U.S., 7% of the budget and 10% of receipts in 2012 will be spent on interest payment on the $15 trillion debt, despite the fact that the interest rate on the 10 year note is only 2%. Neither country is prepared for the huge increases in expenses that will be incurred due to aging baby boomers.

The chart below compiled by The Guardian illustrates the size of the debt and deficits in the world's leading democracies.

In this age of entitlements, there is a paucity of politicians that dare to back plans for eliminating deficits. Ultimately, the fault must rest with the voters for supporting candidates that will not honestly deal with the deficit crisis. Thus, politicians continue to provide entitlements to current voters, while piling on unsustainable levels of debt that they were seemingly leaving for future generations to deal with. Unfortunately, the profligacy has gotten so out of hand that the debt crisis is already starting to explode, even before the aging of the baby boomer generation exacerbates the problem. The problems caused by running huge deficits is going to impact the baby boomers retirement accounts and medical benefits, not just those of their children and grandchildren.

There are few signs that voters around the world are willing to wake up and vote for candidates that will address the need to eliminate deficits. Voters are neither willing to give up their entitlements nor pay enough in taxes to fund them. Thus, voters in he world's leading democracies  will ultimately bring the age of entitlements to an end via an economic collapse unless they wake up quickly. It may take a depression to teach voters that massive  deficit spending is unsustainable

 In the U.S., there is only one candidate for President proposing to eliminate the deficit, Ron Paul. Among the other candidates, the plans of Mitt Romney and Jon Huntsman would slow down the growth of the U.S debt, but would only push back the collapse of the economy due to unsustainable levels of debt back a few years. The other Republican candidates plans for cutting the deficit feature more demagoguery than details. And if Barack Obama is re-elected, he is likely to continue running up unsustainable trillion dollar annual deficits.

Among U.S. Congressional candidates, there are few attempting to appeal to voters with rational plans to cut the deficit. The Republican field of candidates is dominated by those that stubbornly refuse to raise taxes. The Democratic field of candidates is dominated by those that stubbornly refuse to make needed cuts to entitlements. Neither party seems likely to come up with a realistic solution to the deficit crisis even if they succeed in sweeping all three branches of government. And as the failure of the Deficit Super Committee proved, the dysfunctional split Congress can not even come up with a solution to eliminate one tenth of the deficit. Other than Ron Paul, who is unelectable, U.S. voters only choices in 2012 are politicians that are going to lead them right off the cliff into an economic abyss.

At least for now, democracy is failing. Democracy may even become endangered in some countries if voters continue to elect politicians that will not address the problems of the massive amount of sovereign debt. In order for democracy to work, the voters will have to stop electing politicians that spend more than their countries can raise in taxes.

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