Democracy – a sovereign debt generator?

Is it possible that our democratic models have a build-in flaw that eventually leads to bankruptcy?

The “worker bees” of democracy are our beloved politicians, today mostly professional in the sense that their mandate is their primary (if not the only) source of income. And they are all on a contract with set expiration dates – and no automatic renewal feature.

On paper that is all well and good: By keeping our leaders on their toes, they’ll work diligently to have results to show off when election day comes around. If they made good on their promises of last campaign they’re likely to be granted another round. But in practice there is a perverse side effect as we shall see.

To begin with, the economy of our society is a complex piece of machinery where promises made by our favorite candidate are bound to mean changing things. Less funding here, more funding there. Unfortunately, most election campaigns tend to turn into an e-bay bidding war where promise upon promise is piled up in an ever higher pile. When the dust has settled, more expenses have been committed than finances allow. The winner is often looking at his list thinking “how did it get that long?” There is a little bit for everybody – and quite often a lot for some. That leaves five options:

  • Drop some promises and hope people won’t remember when we get to the next election (and get the spin doctors to start working on some “wriggle me free of that one” plan already now)
  • Cut deeper here and there to find the cash to make good on the promises. Make sure it is not your own core voters who suffers the brunt of the cuts.
  • Raise revenues. The good news of being in government is that you get to set the price of the goods and services delivered. There just ain’t much out there in terms of competition. And your customers can’t say “no thanks, we’re fine” (well they can physically move out of your market – and some do – but …).
  • Bank on economic growth. If the economy grows then government revenues automatically grows too. Sometimes in non-linear (accelerated) ways. As you recall this was actually one of the campaign themes. So, obviously we’re in for some nice growth figures – aren’t we?
  • Borrow the sum you are short. And as we all know, governments – having that pretty awesome control over their own income – have to be solid debtors (except if…)

And for the record, to borrow money is equivalent to mortgaging your future. You essentially bet that in the future you’ll earn more money than today – adjusted for inflation (perhaps you’ll earn more as a result of what you’ve used the borrowed money on). The idea is you’ll earn so much more you’ll easily be able to repay both the amount you borrowed and the interests that have accrued.

By now it is no longer a secret to anyone that there are a lot of countries – especially democracies – who have reached a point where the burden of servicing their current debt has become a major item in the overall budget. So big, in fact, that the majority of their on-going borrowing is done to simply meet older contracts arriving at maturity. I don’t know about you but in a private budget that sort of situation is called “the debt trap”. With you inside.

At this stage the boat is still afloat – with about four inches of freeboard.

Now there are variations from country to country but almost all the “traditional” democracies are in a situation where debt, enormous changes in demographics and changing trade winds combine to make the whole machinery extremely fragile. “Just don’t rock the boat” would undoubtedly be a recurring prayer among politicians. But of course some idiot did!

Today we have mortgaged far into the future. In some countries it is a whole generation worth of value creation that has already been spend. And in a few countries the number approaches ∞

If we look back at the past five decades there is a trend emerging – clearly visible: Year on year, with very few exceptions, our governments have consistently sprinkled handsome gifts across our society: Infrastructures to dream of, generous health care systems, comfortable pension schemes and a massive expansion of the public sector. All on borrowed money. All that because democracy – as we have constructed it today – invariably pushes the candidate with the “best” promises into office.

Now, you may argue that we have the politicians we deserve (it’s a democracy remember!) and therefore we’re all, in part, responsible for the current mess. There is some truth to that for sure.
Innumerable polls shows that the public is generally opposed to any new taxes. However, that same public will immediately punish anyone who proposes spending cuts. Unfortunately, the most effective cuts are found in the broad middle class programs where the punishment will be devastating. Cuts in marginal special interest groups doesn’t hurt as bad (in terms of voter punishment) but the healing effect on the bottom line of the budget is correspondingly minute.

Some argue that if only the voters are told the truth, they’ll accept sensible proposals for cuts. So far real world tests of that hypothesis have been few and they have all failed to confirm the theory. Perhaps because “the truth” and “sensible proposals” are either very hard to come by or simply imaginary: There are often no shortage on versions of “the truth” nor on “really sensible” proposals.

Please don’t get me wrong here: I’m not saying democracy is bad and that there is some non-democratic alternative which is better. But what I am saying is that democracy shouldn’t be immune to improvements. Nor should it be forbidden to discuss and question the fundamentals of how we construct our democracy. With more peoples embracing a democratic model than ever before in history and a slew of “mature” ones being economic cliff-hangers, I believe we have an obligation to examine the foundations of the fortress. If there is a systemic flaw to our democratic model, we must fix it. And we must tell the new democracies about it too, lest they run into similar troubles.

I’m afraid I don’t have any quick-fix answers here. But I would dearly like to hear any and all suggestions and thoughts out there. Including arguments that our current democratic models are not sovereign debt machines running hot.

What do you think?

One comment on “Democracy – a sovereign debt generator?

  1. Dan Carroll says:

    What follows are the senile ramblings of a old American;

    Here in the USA, in 1960, John Kennedy set the tone for that decade when he said in his inaugural address “ask not what the country can do for you, ask what you can do for your country”. Among other things, we put a man on the moon with no more computer memory than the average hand held calculator of today.

    In 1929, the Empire State Building was built in 18 months.

    Today, 51 years after JFK’s inauguration, the tone is now “gimmie, gimmie, gimmie”.

    Ten years after 9/11, the twin towers replacement is still a work in progress.

    Self determination cannot be had without self sufficiency.

    As the old saying goes, “a democracy can only exist until the citizenry realize they can vote themselves largess from the government treasury”. (or something to that affect)

    A simple law of the universe is that everything will decay unless maintained appropriately. We the people have not properly maintained our democracies; instead of improving our lot, we have spent beyond our ability and in doing so our democracy decays, and rightly so. Instead of voting for politicians that would properly maintain our democracy, we vote for politicians that promise to “give us stuff”.

    Nothing worthwhile can come from/of government when spoiled, self centered citizens abuse the privilege of the vote.

    The failings of democracy do not lie with government but with the we the people.

Leave a Reply

Your email address will not be published. Required fields are marked *