the illusion of government payment stability
Topics: Regulation
17 Oct 2008
From: Ervan Darnell
Some time ago Eric noted that socialized health care cannot "work just like Medicare does" because Medicare is a cost transfer to the private system, and not a plan that can work universally.
A similar observation applies to government job security and government payments (e.g. social security). With the market crash of the last month, people are tempted to view the market as unstable and government as stable. This has it wrong in the same way the Medicare argument is wrong.
While the rest of us are taking a huge pounding, government payments are not being cut. Instead, the beating the rest of us takes is made worse because our taxes as a percentage of our incomes (likely to fall a bit) or especially of our investments are going to rise to keep government payments the same. That is, the government has amplified private sector instability to guarantee it's own. There is no magic in that.
Isn't it liberals who are all about "share the wealth."? Okay, here is a chance to share the pain, by having government employees and welfare recipients take as much of a cut as the rest of us. That's darned unlikely to happen of course.
An indirect way this has happened is with the recent bailout bill. Literally, $1T was made and lost each day as Congress debated back and forth on a bailout bill. When there is no principled way to decide what's going to happen, and no firm law in place to guide people's expectation, it's inevitable that markets will gyrate wildly in response to Congress's wild gyrations. Intervention creates instability as a consequence of creating uncertainty.
Looking at another aspect of the stability problem, it is just assumed that government insurance creates stability (e.g. FDIC). That's true to a point, but it only transfers the instability somewhere else. Like all insurance companies, the insurance is only as good as the backer. The Iceland government is essentially bankrupt[1], in part because it believed the government could be an insurer. While I suppose I have a wild fantasy of the U.S. government going bankrupt (and then going away), that would obviously create a financial crisis far greater than anything we are seeing now. That doesn't seem likely, but consider the possibility of Congress borrowing maybe $3T instead of $1T, and a crack of doubt appears in the bond market such that T-bill rates sky rocket in a wave of panic the same way stocks have dropped. That feedback loop would be a monumental disaster, and it's the one we court by trying to government-insure our way out of this one.
[1] http://www.iht.com/articles/2008/10/09/business/icebank.php
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Ervan Darnell, http://www.kelvinist.com
"An election is nothing more than the advanced
auction of stolen goods." --- Ambrose Bierce
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