Saturday, December 17, 2011

The Politico Painted Corner

“Those politically painful steps [in the euro zone] involve selling off state enterprises, firing tens of thousands of politically connected state employees and removing jealously guarded protections that limit competition in dozens of professions."

“Herein lays the crux of the European problem. Although most of the other troubled European countries may not have the same degree of tax evasion and nepotism that Greece has, each of these countries will be forced to implement painful reforms that are likely to endanger the jobs of many European politicians. None of these lessons should be lost in the US either”. – Michael Farr (1)

The above observation finds its root in public choice theory. That is,  politicos through the mechanism of government build dependent constituency classes through taxpayer dollars and/or special conditions. “Dependency” comes in many varieties such as direct transfer payments, crony capitalism, bloated public payrolls, creating special conditions, etc. The basic flaw with political constituency building exercise is that the process is built upon maintaining or increasing taxpayer dollars funnelled to the constituency and/or maintaining or expanding special conditions. Failure to produce the taxpayer dollars or special conditions means loss of the political constituency.

An example may better illustrate. Politico A knows the taxpayer is a widely diffused and to a major degree unorganized/an unrepresented group regarding tax increases. If the politico raises taxes by $1 on the very diffuse group and bestows the many, many one dollar tax extractions to a much smaller and focused group, then the recipient group will support the politico bestowing the taxpayer funds upon them. The highly diffused and unrepresented individual tax payer will make the rational decision that opposing the $1 tax increase is not worth the time and effort to oppose. Hence we have hundreds, maybe thousands, or even millions of taxpayers who individually will not take the time to oppose a $1 tax increase and the small incremental tax increase is then bundled and given to a smaller group which then become the dependent political constituency of the sponsoring politico.

Special conditions act in the same manner. If competition is lessen or distorted for the benefit of a small group which then causes a $1 increase in item XYZ’s  price, the widely diffused taxpayer/consumer once again will not take the time to oppose the $1 increase yet the $1 multiplied over many purchases of item XYZ is bestowed on a particular small and focused group.

A third rail occurs when the politico uses debt to finance political constituency building. That is to say, when a tax increase is unpopular, or taxes themselves will not create the needed revenue for the particular or aggregate political constituency building exercise(s) then debt becomes an optional revenue stream to bestow or create conditions. As more and more political constituency exercises are initiated by wider and wider number of politicos, debt is used in a fashion that increases at an increasing rate.

An overriding assumption by politicos is that the recipient class will not give up their advantage and hence the politico has created a perpetual constituency.  If the advantage is threatened, the politico champions the advantage with the built-in dependency constituency supporting the politico’s effort to retain the advantage for the group.

Hence it becomes problematic that the withdrawal of the incremental tax or incremental price causing special conditions will alienate the particular associated recipient class.  Therefore, the politico cannot allow, nor heaven forbid sponsor, the withdrawal of the advantage.

The alienation of losing a particular advantage [dependency] causes the recipient group to seek the advantage elsewhere. That is to say, the politico has created a Frankenstein of sorts in that political constituency building exercises are self-completing regardless of the sponsoring politico i.e. if politico A will not deliver, the recipient class will merely search and support an alternate politico that will deliver. Hence the politico perceives that the power emanates from the politico, that the politico thinks he has created the perpetual constituency that re-elects the politico come hell or high water, when in fact the politico has created something much larger that can consume the politico.

The above examples of political constituency building through taxpayer dollars, special conditions, and mounting debt occur based on the implicit assumption that unlimited taxes can be levied [which cannot] and that competition can be continuously reduced and the costs constantly passed on [which it cannot], and unlimited debt can be issued and accepted [which it cannot]

What happens when taxes are at a maximum, competition at a minimum, prices at a maximum, and debt at a maximum? The politico has painted them self into the proverbial corner. However, the momentum of political constituency building exercise continues. The recipient class demands its advantage. However, politico A-Z have nothing else to provide  when taxes are at a maximum, competition at a minimum, prices at a maximum, and debt at a maximum. To continue on the same course is assured collapse and to retrace steps is assured political defeat.

Therefore, the politico, so sure of the perpetuation of political constituency through political constituency building exercises find their self-assuredness of constituency building through taxpayer dollars, special conditions, and escalating debt was no more than a path to the eventual demise of the politico by system failure/collapse or political defeat caused by the exact same dependency recipient group the politico purposely created.

“But we have inherited a vast number of social ills which never came from Nature. They are the complicated products of all the tinkering, muddling, and blundering of social doctors in the past. These products of social quackery are now buttressed by habit, fashion, prejudice, platitudinarian thinking, and new quackery in political economy and social science”.

“The greatest reforms which could now be accomplished would consist in undoing the work of statesmen in the past, and the greatest difficulty in the way of reform is to find out how to undo their work without injury to what is natural and sound. All this mischief has been done by men who sat down to consider the problem (as I heard an apprentice of theirs once express it), What kind of a society do we want to make? When they had settled this question a priori to their satisfaction, they set to work to make their ideal society, and today we suffer the consequences. Human society tries hard to adapt itself to any conditions in which it finds itself, and we have been warped and distorted until we have got used to it, as the foot adapts itself to an ill-made boot. Next, we have come to think that that is the right way for things to be; and it is true that a change to a sound and normal condition would for a time hurt us, as a man whose foot has been distorted would suffer if he tried to wear a well-shaped boot. Finally, we have produced a lot of economists and social philosophers who have invented sophisms for fitting our thinking to the distorted facts.

Society, therefore, does not need any care or supervision. If we can acquire a science of society, based on observation of phenomena and study of forces, we may hope to gain some ground slowly toward the elimination of old errors and the re-establishment of a sound and natural social order. Whatever we gain that way will be by growth, never in the world by any reconstruction of society on the plan of some enthusiastic social architect. The latter is only repeating the old error over again, and postponing all our chances of real improvement. Society needs first of all to be freed from these meddlers—that is, to be let alone. Here we are, then, once more back at the old doctrine—Laissez faire. Let us translate it into blunt English, and it will read, Mind your own business. It is nothing but the doctrine of liberty. Let every man be happy in his own way”. William Graham Sumner, 1883 (2)


(1)    Market Commentary from Michael Farr, 12/15/2011, Farr, Miller, and Washington.

(2)    What Social Classes Owe to Each Other, William Graham Sumner, 1883, page 72 and 73.

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