The Universal Suffrage/Entitlement Paradox

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Imagine it is the spring of 2008. You are one of the many long term investors at the annual meeting of Bernard L. Madoff Investment Securities LLC, one of the most prestigious firms in town. A dissident just presented a complex analysis implying that Bernie is paying off old investors with money brought in from new investors. He's demanded a forensic audit and a vote of no confidence on the fund's management. How do you vote?

Imagine it is the spring of 2011. A special election is being held in Upstate New York pitting the party of the status quo against the party that just admitted to the American people that promises of lifetime financial security made by politicians from both sides of the aisle for half a century cannot possibly be kept. How do you vote?

Imagine it is the spring of 2012. The streets of Athens are ablaze as protesting civil servants whose pay and benefits have been cut toss Molotov cocktails into one bank branch after another. A coalition is running for office promising to end the unpopular austerity programs demanded by European lenders trying to stave off Greek default. They contend that everything could go back to normal if only the rich countries of Europe would pay their fair share. How do you vote?

Imagine it is the fall of 2012. The President of the United States has raised a billion dollars to finance his re-election campaign based on a platform of blocking all efforts at fundamental change. Any proposal to make Social Security or Medicare solvent is met with television ads showing grandmothers in wheelchairs being pushed off cliffs. Economic growth has stalled and unemployment is rising along with inflation. A coalition of politicians and pundits promise that all of our economic problems would be solved if only the rich could be forced to pay their fair share. How do you vote?

In case you haven't noticed, Entitlement Democracy has a fundamental flaw. Constitutional limitations on government power that prevent wealth redistribution programs from getting started have proven to be a failure. How do you campaign against free stuff? Who has the discipline to stop the government from agglomerating power to respond to "emergencies?"

Once the majority achieves unlimited power nothing can block its desires even if voters vote themselves the mathematically impossible. This begs several questions. Can the ballot box ever be used to curtail unsustainable transfer payments if these payments are promised to a majority of voters? How can today's voters be constrained from voting themselves long-lived benefits that amass unfunded liabilities that won't have to be faced until some distant tomorrow? What happens when tomorrow finally arrives?

We are going to find out.

Counting on bond vigilantes to discipline democracy's runaway spending is a valid idea. Too bad it has failed. That's because bond default insurance can be purchased on the so-called free market. This approach has merit too if there were only such a thing as a free market, which means the freedom to fail. But thanks to Democracy the freedom to fail has failed! As we've recently seen when giant insurers go broke, as did AIG, the taxpayer ultimately foots the bill. This is normally done as a bipartisan effort in the name of "saving the system" from some supposed worse fate.

But wait, there's more. Thanks to the Dodd-Frank bill Congress has established a category of "systemically important financial firms" that cannot be allowed to fail. In return for being closely watched these firms will be granted the same kind of implicit federal backing once guaranteed to Government Sponsored Entities like Fannie Mae and Freddie Mac. And the wheel goes round and round.

Vladimir Lenin once said that "Capitalists will sell us the rope with which to hang them." Who needs Lenin? Unlimited democracy cut out the middleman.

Do you really think it will be possible to convince a majority of voters that they cannot eat their cake and have it too? Especially when they've been lead to believe that someone else will always bake them another? The illusion that there is "someone else" to take care of us can be maintained as long as both political parties are complicit, as they have been for decades. With Paul Ryan sticking his neck out, or into the electoral noose as the case may be, complicity has broken down and all hell has broken loose.

This provides one slight glimmer of hope, or if not hope then justice as a consolation prize. Even Democratic Senators don't seem to believe their own fairy tales any more, joining Republicans to vote down their own president's 2012 budget proposal 97 to zero. This is after lauding it just a few short months ago as a "responsible proposal that should have bipartisan support."

The revised Democratic strategy seems to be to make no budget proposals whatsoever, counterpunching their way back into office by demonizing every effort to acknowledge fiscal reality. Given how easy it is to scare elderly voters this has a good chance of working. If it does there will be justice as these same politicians will still be in office when the system comes crashing down around them.

 

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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