European people hurting, not governments

European people hurting, not governments

John Tamny: European people hurting, not governments

By JOHN TAMNY / The economist edits the website RealClearMarkets

We regularly see headlines in the financial press about an ailing European government facing “austerity,” “severe cuts,” and maybe default due to a mismatch between incoming revenue and outgoing liabilities. What’s not explained is why this is so problematic.

In fact, it’s not problematic.

Frederic Bastiat long ago observed that the State is the grand fiction through which wealth is redistributed to others, and with the producers hurting, so is the State’s wealth redistribution machine. We can lament the growth of European welfare states, but shouldn’t the present point be that since, those the people whose labors support governments are getting by with much less, shouldn’t governments similarly shrink?

We keep hearing about the “painful sacrifices” governments must make in the present, but aren’t those alleged sacrifices something governments should endure with a smile since governments only exist at the pleasure of those who pay for them, and their supporters are struggling right now.

And what about the individuals whose labors produce little to no economic value, but who are reliant on the government funding provided by those who are productive? Can they say with a straight face that their benefits should remain intact while their benefactors earn less and, worse, potentially face job loss?

Not commented on enough is just how obnoxious is all the government wailing about a lack of funds. It’s almost childlike in that only a child lacking broader knowledge of the human condition would complain about a reduced allowance in the midst of struggles for the individual bestowing the allowance. In this case it’s the limping people of Europe who provide the means for the monstrous European governments.

So with governments acting in childlike ways it’s time to let those same governments experience the pain of allowance cuts in concert with default if they prove unwilling to more than match the austerity faced by those they annually fleece.

Of course, the supposed problem with governmental defaults is the implications for banks. Having loaded up on government debt with regulatory approval (yet another reminder of the sheer absurdity of more regulation as the path to financial health), many institutions face bankruptcy if governments foist on them payment haircuts.

If so, it’s time we experience a few bank failures so that we as individuals realize that life goes on, and, with it, economic productivity. It’s been more than a century since banks have been the grand source of credit that bailout supporters proclaim, so let’s allow one or many banks to go under for having committed the egregious error of betting the farm on government debt.

The naysayers will wail about “counterparty risk” and a “collapse of the financial system,” but, in truth, we’ll see only the collapse of the entities that erred in assuming that governments don’t default. As for counterparty risk, it applies in all areas of commerce among all businesses, and if a few counterparties are burned, they’ll have learned a valuable, economy-enhancing lesson about spreading one’s risk around.

The banking system itself, far from ruined, will emerge from such a scenario far healthier for having poorly managed institutions swallowed by better managers. And with economy-sapping bailouts off the table, the smaller banks that the Left naively seek through regulatory force will become an un-coerced market reality.

And, while default will by no means shut governments out of the debt markets altogether, the cost of borrowing for governments will surely rise. This on its own will ensure governments that are smaller and happily less consequential, plus the investors who shun government debt altogether will find other, growth-oriented endeavors to allocate capital toward.

Europe today has governments operating solely with resources taken from others and that are unwilling to downsize despite massive deleveraging among the individuals who provide them with funds. Juvenile as it sounds, that’s rude.

Since governments seemingly won’t take the hint, it’s time that the citizenry on which they rely allows them to default. Europe will get better-run banks and smaller government in the process, a bonus for the productive in Europe and reminding governments from whence their funds actually come.