Thursday, June 25, 2009

The Big Government Bubble

Over the past seventy years, Americans have seen an incredible growth in their country’s standard of living and position in the world. America is the world’s undisputed superpower, militarily and especially economically. The dollar is the world’s standard currency, and the American economy drives that of the rest of the world.

Americans also live luxuriously. America consumes twenty-five percent of the world’s resources, and only a few countries have a higher standard of living. The American Dream—a house, two cars, and a college education (or well-paying blue collar work) is a widespread reality in America, and America is one of the few countries in which every citizen has a chance at such a lifestyle.

This sort of lifestyle started after the Second World War. True, before that, America was known as a country that offered good living conditions, and played an important part in the world economy, but living conditions in America were not notably better than in Europe, and the richest Europeans probably lived better than the richest Americans.

(Certainly, Western culture was centered in Europe at the time. The magician Harry Houdini, for example, traveled to England to gain legitimacy by wowing English audiences before returning to America a success. Now European stars like Simon Cowell have to impress American audiences to get the highest praise in their home countries.)

After World War II, however, things changed, and American became the superpower it is today. (The Soviet Union offered some competition, but never came anywhere near American living conditions or economic strength, and eventually spectacularly collapsed). So, what changed after World War II to make America to powerful?

To some degree, it was World War II itself, and the subsequent Cold War. War provides the most powerful incentive for innovation and production, and America progressed technologically and economically during the war. (Indeed, the war lifted America out of the Great Depression).

And World War II eliminated some of the competition, too. Most of Europe was trying to rebuild after seven years of total war. America became the world’s economic leader partly because the foundations of the rest of the world had been shaken.

But that doesn’t explain why the U.S. economy kept growing in the seventy years after the war. There must be another explanation for the U.S.’s growth.

I think that that the reason for America’s growth is due, in part, to the federal government’s spending. Education is important. After World War II, the GI Bill provided housing and college education to hundreds of thousands of young Americans. Worries about retirement cause hoarding, which slows spending. But Social Security eased worries about retirement. Housing is expensive—but it’s not so bad when Fannie Mae or Freddie Mac can (indirectly) provide you with a mortgage. Medical care is expensive too—but since only about 10% of Americans pay for their health insurance out of their own pocket, Americans don’t have to worry about that so much.

All those programs are expensive to pay for. So the federal government, displaying real American ingenuity and know-how, devised a clever solution to that problem: it stopped paying for it. The federal debt skyrocketed—but it didn’t affect your average American, and nobody cared.

You might remember the housing bubble, which recently burst and had a lot in common with what we are dealing with today. Housing prices went higher and higher, and people borrowed more and more money on the value of their homes. Then people realized there was a surplus of housing, and the housing market shrank. But since many people had borrowed on their homes, they were forced to default on their loans, which hurt the banks, and threw the whole economy into chaos.

Like the housing market of the Bush years, the government is growing too fast and has too many liabilities built into it. When the government is forced to deal with its debt—and it will be, eventually, it will no longer be able to keep up its lavish welfare system.

And when that happens, the whole system will come crashing down. Americans will be forced to reach into their own pockets to pay for their health care, housing, education, and retirement. The government bubble will burst. And while it’s impossible to predict the precise effect that will have on the economy, it is certain it will not be pretty.

Of course, economics is tricky, even for experts, and maybe none of this will come to pass. But I think it will, though I hope I’m wrong.

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