Musings of a late 18th Century Scottish political economist (and not the one called Adam Smith!)
A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship. ALEXANDER FRASER TYTLER
Tytler believed that, on average, the world’s greatest civilizations have had a life-cycle that has lasted about 200 years. During that period, nations tended to evolve through the following stages, starting at bondage. If so where is the West now? At Complacency, Apathy or even perhaps Dependence?
Having spent time campaigning in Britain during perhaps the most important General Election in 30 years, in the moment, one cannot help but be swept away by the excitement surrounding the event. But then, once one thinks about the deeper issues at stake, one cannot help but be appalled by it too. Juxtaposing the so-called debate that has taken place in Britain with events in Greece highlights the profound problem that all modern Western democracies (including Japan) now face.
And the problem is this. In the run-up to the British election, there was almost no acknowledgement by any of the three main party leaders of the elephant in the room – what to do about the enormous Black Hole (some £163bn large) in Britain’s finances. Watching the leaders in the economic debate quibbling over a ‘trifling’ £6bn made me realise that, like John Cleese in Fawlty Towers, they simply dared not “mention the war”, the war fighting the deficit that still lay ahead. Of course, they may have been blissfully ignorant of the enormity of the problems they faced (with Cameron at least, unlikely; with Brown I really am not so sure), and there was a touch of denial even amongst those who have recognised that a problem does indeed exist. Although relative to the size of its economy, the Greeks face a decade of (ahem!) cold turkey, in absolute terms, the British face a far larger problem. Yet, as the Institute of Fiscal Studies painfully illustrated during the election campaign, no party was willing admit to that problem’s true size for fear that the voters may punish honesty in the polling booths. Perhaps it is as if, as Jack Nicholson famously barked in the film A Few Good Men, the voters simply “can’t handle the truth!”
In Hindu cosmology, the earth rests on the backs of a group of elephants which in turn stand on the back of the turtle, Akupara. (And if you are thinking “What is beneath Akupara?”, as the quip goes, it is “turtles all the way”!) In the above phrase “voters may punish honesty” lies an indication of a far more monumental challenge than even the largely unacknowledged deficit elephant in the room, the figurative turtle Akupara on whose back that jumbo deficit stands. This Akupura is quite simply that democracy as we know it may be heading for a fall.
So heavy is the debt burden now facing Britain and indeed most Western nations and especially Japan, it is not impossible to think that before they too will start to do a Greece and threaten to break the back of the democratic foundation on which their sovereign debt now stands. (How ironic! Greece, which gave the world democracy, is now the nation most clearly revealing its limitations – that the sovereign debt of the Greek state may yet be brought low by demos by the demos.) This capitulation will happen either by way of outright default as could still happen in Greece or disguised default via devaluation as is already happening in the UK, US, Eurozone and Japan.
To put this seemingly apocalyptic forecast on a sounder footing, let me back track. Keynes’s great achievement in the Great Depression era 1930s was to devise a mechanism that could finesse the economic problems of the time and engineer a way of saving democracy from the grasp of communism or fascism. By first throwing off the fetters of the Gold Standard, he then identified an escape route – deficit spending or the creation of fiat money unbacked by gold – that would allow governments to borrow from the future in order to kick-start the present. What this enabled them to do was to re-ignite demand artificially with money borrowed from future generations; this practice gave us the term “demand management”, the predecessor to macroeconomics. Though Keynes died before the longer term (and broadly negative) consequences of Keynesian jump-starting would become all-too-apparent, there is ample evidence in Keynes’s writings that suggests he would have used the subsequent surpluses of the resultant good times to refund the temporary expediency he recommended be adopted to escape the bad times.
Sadly, and perhaps this defines the ageing gene written into the DNA of democracy, those politicians who followed Keynes’s advice as to how to end the bad times could not, when the time came to do so, bring themselves to take back in the good times (for instance Harold Macmillan’s “You’ve never had it so good” times of the 1950s) what they had effectively borrowed from that now improved future. Instead they rolled the debt they had incurred and actually added to it, even in the good times. Over the 65 years that followed WW2, in Britain as elsewhere in the democratic world, the essential pattern has been that, whatever the party in power (yes, even the parties of allegedly small government on the Right: who can forget the Military Keynesianism of Reagan or Cheney’s devil-may-care dismissal that “deficits don’t matter”?), the ruling party expanded the role of the state in the economy and so increased the accumulated debt that became the detritus of that now near-permanent fiscal expansionism.
Note that, unlike in the US where the Republican “right” often vied to be more Keynesian than the Democratic “left”, in Britain the “good guys” were usually the Tories but only because they expanded the state and the National Debt more slowly than Labour. For all her penny-pinching reputation, Margaret Thatcher’s achievement was that, during her time, the state’s share barely expanded at all: but even the tight-fistedness of the Iron Lady herself could not contract it.
Democracy as it is practiced seems to confirm – at the macro level – the central finding of the behavioural school of economics that surrounds Prospect Theory: Humans have an irrational tendency to be less willing to gamble with gains than with losses. This insight also means we are extremely reluctant, often to the point of being bull-headed about it, when it comes to giving up what we already have even if there is a high chance that, by so doing, we might get even more. Or, as the old proverb has it, humans do indeed believe and behave as if we believe “A bird in the hand is worth two in the bush“.
The political point here is that democratic electorates are loss averse: once they have something, they are extremely reluctant to give it up. In reality what this has meant is, over the past century or so, that once the democratic state has expanded into a particular economic space (frequently using deficit financing to do so), electorates have been extremely reluctant to support a party who subsequently campaigns on a policy that it intends, if elected, to then withdraw from that space. So, as time passes, democracy ratchets up a deficit-expanding state’s involvement in the economic life of its people: when Blair became Prime Minister, the state accounted for 42% of Britain’s GDP; when, 13 years later, Brown resigned as Prime Minister, that ratio had risen to 52%!. As the state expands, state spending becomes an addictive drug that the electorate seemingly cannot live without, as the Greek tragedy playing out today amply illustrates.
In 55BC, Cicero warned us about the growth of the size of the state, state debt and the level of addiction of the populace on state spending arguing that: “The budget should be balanced, the Treasury should be refilled. Public debt should be reduced. The arrogance of officialdom should be tempered and controlled. The assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” But apparently to little avail!
Democracy would be sustainable even in the long run if it lived within its means and did not fall for Alexander Fraser Tytler’s curse and, giving in to the electorate, consistently spend more than it earned. The result is default overspending what I think of as the Keynesian rounding error, a deficit whose annual cost is typically 3%+ of GDP. But perhaps my belief in the idea of a forever young democracy without the age-lines of rising deficits is naive: given the competitive nature of democratic politics and its shortish electoral cycle of 4 to 5 years, each new election not only sees politicians promising “A better life for all” (the slogan used first by the ANC and then by Blair for Labour in the 2005 UK General Election), but also sees those few brave politicians advocating fiscal prudence being cast in the role of being political Scrooges so rendering themselves most likely unelectable.
The result has been a slow but steady rise in the accumulated national debt measured against GDP for almost all democracies over the past 70 years. And, as if this were not enough, the killer blow has been the fact that the population pyramids of these same democracies have aged materially during this same period. These democracies have borrowed more and more from their grandchildren but then had less and less grandchildren that would eventually be obliged to repay those intergenerational debts. This pincer has all the hallmarks of an accident waiting to happen.
Only more recently have the longer term, negative consequences of spendthrift Keynesianism, in good times and not merely in bad, started to be realised, and in both senses of the word ‘realise’! (To her credit, Joan Robinson, the 1950s Cambridge economist who was the unofficial guardian of Keynes’s legacy, saw the first stages of the political hijacking of Keynes’s Big Idea happening and, despite her leftish sympathies, dubbed these policy refinements to be “Bastard Keynesianism”; one imagines JMK, for his part, probably seething somewhere on a cloud Up There given how modern democracy has perverted his beautiful insight).
Meanwhile, the ticking of the demographic time bomb has got louder. The size of the accumulated debt has got bigger. And, now, for most Anglo-Saxon nations, the intermediate funders of this debt, who have been foreign, now appear to be in the early stages of realising that, rather than parking their savings surpluses in US T-Bills or UK Gilts, recycling their surpluses domestically (usually this means therefore in the East) is an increasingly attractive opportunity. If this trend continues, this redirection will gradually constrict especially the current account deficit running Anglo-Saxon nations.
Keynes actually warned of this outcome in his The Economic Possibilities of our Grandchildren albeit in a roundabout and back-to-front way. (I regard this brief, 7 page opinion piece to be one of his most underappreciated masterpieces.) The central observation he made was that, if each of us could save but a relatively small amount every year and see those savings compound at 2% real per annum, year in year out, and then let compound interest sprinkle its magic dust on our savings pot, we would have enough money to retire on. How ironic that the politicians should then take his Big Idea and subject it to this exact same logic except on debt rather than savings and instead end up with a nightmare.
Since the late 1950s, the typical Western nation (especially the Anglo Saxons) has run a deficit of at least 3%, year in year out. It has let it compound over time, rarely reducing it rather occasionally running much higher annual deficits in the wake of periodic cyclical downturns, Great Society-style programmes or wars. This has left them today with deficit to GDP ratios approaching and sometimes above 100%. The magic dust of compound interest has produced not a savings miracle but a debt monster.
What has gone wrong? Keynes’s most famous saying was “In the long run, we are all dead”. It was a response to the warnings issue against his fiscal spending, which suggested the best route would have been to let matters mend properly even if it took time to do so. One almost imagine someone saying to Keynes, “Do not intervene, the situation will right itself naturally in the long run”. To this, Keynes replied – tacitly acknowledging that this might well be true but that such delay was just not good enough –“(That may be, but) in the long run, we are all dead”.
And therein lies the fatal conceit of democratic Keynesianism. We may well all be dead, but our children and especially our children’s children will not be, and when the music eventually does stop, they will have to pay. The tragedy of the present is that today, now, is the generation of Keynes’s children’s children. And as Reinhart and Rogoff’s study points out, the music could very well stop in this generation, not in the long run, not even in the medium run but in the short run. But given the mañana of the fatal conceit, the current generation in the West bumbles on, its capitalists trying (in Karl Marx’s words) to sell the hangman the rope that will eventually close round the neck of democratic capitalism as we know it.
Perhaps I am being too hard on Western politicians. Perhaps they are all walking down the one-way street of destiny, a street from which there are no paths back to the Yellow Brick Road. Perhaps, as that great supporter if doubter of capitalism, Joseph Schumpeter, foretold and with fear in his words, the great game of democratic capitalism would eventually collapse under the weight of its own internal contradictions, contradictions that would only be revealed with the passage of time.
Schumpeter’s fear was the one above: that the more mature a capitalist democracy (underwritten or more accurately undermined as it would be by those Keynesian error accounts) became, the less pain it would be prepared to endure. To the extent that pain could be postponed, it would be through borrowings both public – think quantitative easing! – and private. Schumpeter also foresaw the result as being one where, as the lifecycle of the Janus of democratic capitalism aged, we would see more of its democratic face and less of its capitalist one. But by undermining capital by postponing destruction and instead borrowing more and more to maintain the illusion of creation, the delicate balance that required both to interact would be destroyed and so too would capitalism.
Here I part ways with Schumpeter – I think rather that democracy will die. Capitalism, the wily old fox that it is, will likely to live on in a different political combination or, in the title of a book by a Chinese author Kellee S. Tsai, Capitalism without Democracy.
 There is some dispute about whether Tytler ever said these exact words, but the sense is very much in keeping with what he wrote in his various treatises on the subject of democracy.