Belmont Club

The Surprising Weakness of Invincible Institutions

Winston Churchill memorably predicted the end of the German East Asia Squadron when it slipped out of Tsing-tao harbor under Admiral Maximilian von Spee. “He was a cut flower in a vase, fair to see yet bound to die.”  Winston knew that the Spee’s s squadron however imposing and bravely led had no means of support.  Sooner or later it would come to grief, which it duly did.

The same calculation must apply to the giant bureaucracies that pretend to rule the world.  At first glance there is nothing seemingly more formidable than the interlocking shield wall of public institutions and public sector unions. One writer argued that JFK was “the real killer of Laquan McDonald” because he first authorized public employee unions and “police unions make it impossible to get rid of bad-apple cops”.  Camelot had created a Frankenstein monster able to run roughshod over everything.

Yet it’s a monster which just can’t seem to do much.  For example the Washington Metro, the pride of the nation’s capital, is collapsing.  Once “it was a rail system of the future. Then, reality set in.”  Perhaps the most telling indicator of fundamental weakness is the public pension crisis.  A study by the Hoover Institution covering 97% of all state and local governments found that politicians have little or no ability to meet their pension promises.

Most state and local governments in the United States offer retirement benefits to their employees in the form of guaranteed pensions. To fund these promises, the governments contribute taxpayer money to public systems. Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference. … In aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. …

What is in fact going on is that the governments are borrowing from workers and promising to repay that debt when they retire.

How do bureaucracies get so big they can’t pay themselves? Assertions that it “can’t possible happen” are refuted by history in instances ranging from Henry VIII’s dissolution of the monasteries in 1536, which turned thousands of clergy starving into the streets to recent examples like the collapse of Soviet pensions or the debasement of the Greek pension system.

In each of these cases the impossible happened, just as it’s happening in Venezuela, where Joel Hirst describes the collapse of a whole system. “I never expected to witness the slow suicide of a country, a civilization. I suppose nobody does.”

national suicide is a much longer process – not product of any one moment. But instead one bad idea, upon another, upon another and another and another and another and the wheels that move the country began to grind slower and slower; rust covering their once shiny facades. …

Hate, as a political strategy. Law, used to divide and conquer. Regulation used to punish. Elections used to cement dictatorship. Corruption bleeding out the lifeblood in drips, filling the buckets of a successive line of bureaucrats before they are destroyed, only to be replaced time and again. …

Tonight there are no lights. Like the New York City of Ayn Rand’s “Atlas Shrugged”, the eyes of the country were plucked out to feed the starving beggars in abandoned occupied buildings which were once luxury apartments. They blame the weather – the government does – like the tribal shamans of old who made sacrifices to the gods in the hopes of an intervention. There is no food either; they tell the people to hold on, to raise chickens on the terraces of their once-glamorous apartments. There is no water – and they give lessons on state TV of how to wash with a cup of water. The money is worthless; people now pay with potatoes, if they can find them. Doctors operate using the light of their smart phones; when there is power enough to charge them. Without anesthesia, of course – or antibiotics, like the days before the advent of modern medicine.

Venezuela is a country floating on oil with a climate where anything grows and yet it is doomed. Yet even that agony has been eclipsed by the crisis in Brazil, where a presidential impeachment is in progress. “Founded by Portuguese monarchs who moved their court to Rio de Janeiro in 1808, Brazil has experienced almost every conceivable sort of rule over the past two centuries. Its leaders have run the gamut from emperors and dictators to democrats and former Marxists. Regardless of their politics, however, almost all of them have shared a commitment to the Leviathan state as the engine of progress.”

“The problem is, from time immemorial, Brazil’s political leaders only see one way forward, the growth of the state,” said Fernando Henrique Cardoso, a former leftist intellectual.  The European Union saw the march of progress through the prism of institutional expansion also. And they too are running out of money.  Recently the EU told Palestine that its stipend will wind down though Brussels expressed the hope that Israel would pick up the slack.

Turkey may receive European largess a little longer, according to David Goldman, but only by resorting to blackmail. “Europe is paying Erdogan to stop the flow of refugees, which Erdogan has threatened to accelerate if his demands are not met.”  But the day may come when even Brussels can no longer cough up enough to keep Turkey going. Goldman writes:

too many countries have a stake in Turkey’s stability to allow a banking crisis to develop. The Gulf states appear to have financed Turkey during 2013-2014, when the country ran an enormous current account deficit. The Europeans will continue to finance Turkey for the time being. … Turkish consumers have a different kind of problem: debt service consumes so much of their income that they cannot continue their present level of purchases much longer.

Turkey’s financial bubble will pop eventually, despite the best efforts of its funders to postpone the problem. In the meantime, enabling Ankara ensures continued instability in the region, more humanitarian crises and more refugees.

If the bubble bursts Turkey will find even politics cannot protect it from arithmetic. For example Section 5 of the Illinois Constitution prohibits government pensions from being “diminished or impaired,” yet it is facing an ongoing pension crisis “now at a record $111 billion, according to the Illinois Policy Institute.”

Unsustainable bureaucratic behemoths turn out to be what Churchill described: “a cut flower in a vase, fair to see yet bound to die.” They are not invincible, but quite the contrary have the distressing propensity to die.  The irony is that the gigantism voters often associate with safety is in itself a risk factor.  The bloat isn’t protection, but a heart attack waiting to happen.  Economists have long known that being “too big to fail” is actually a source of moral hazard.

Global history records governments of all political persuasions using taxpayer funds to support distressed institutions. Perceptions of this implicit guarantee … may also cause ‘moral hazard’. This means it may encourage systemically important institutions to take on more risk than is optimal, since they believe they receive any benefits from the risk taking while the government will bear the cost of failure.

Almost every saga of government expansion turns out to be a replay of the same old story.  The harder question to answer is why humanity keeps falling for it.  Bureaucracies don’t even operate in their own sustainable interests.  What good are bloated pensions if they can’t be paid?  Hegel’s simple answer was “we learn from history that we do not learn from history.”  But the mystery is deeper than that.

When Barack Obama recently endorsed Angela Merkel’s proposal to admit more refugees into Europe he justified it with a curiously Marxist phrase. “She’s on the right side of history on this,” Obama said.  Perhaps the key to understanding why leaders repeat the same mistakes lies in Obama’s remark.   Leaders live within their own mythical histories and climb hierarchies within them.  The phrase “I have had a dream,” was uttered long before Martin Luther King — by King  Nebuchadnezzar in the Bible.

“I have had a dream that troubles me and I want to know what it means,”  said Nebuchadnezzar and he sent far and wide for someone to explain things.  It comforted him greatly when Daniel told him the dream meant he had a place, albeit a transient one, in cosmic history.

Your Majesty looked, and there before you stood a large statue—an enormous, dazzling statue, awesome in appearance. The head of the statue was made of pure gold, its chest and arms of silver, its belly and thighs of bronze, its legs of iron, its feet partly of iron and partly of baked clay. While you were watching, a rock was cut out, but not by human hands. It struck the statue on its feet of iron and clay and smashed them. Then the iron, the clay, the bronze, the silver and the gold were all broken to pieces and became like chaff on a threshing floor in the summer. The wind swept them away without leaving a trace. But the rock that struck the statue became a huge mountain and filled the whole earth.

“This was the dream, and now we will interpret it to the king. Your Majesty, you are the king of kings. The God of heaven has given you dominion and power and might and glory; in your hands he has placed all mankind and the beasts of the field and the birds in the sky. Wherever they live, he has made you ruler over them all. You are that head of gold.

“I have a dream.  One day I’ll be on top of the world.”  Never mind that the statue had feet of clay so long as “you are that head of gold” even for a while. The great bureaucracies exist less for the public service than for the momentary exaltation of its great ministers.  It was always for them.  Us, not so much.

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