New Rule for Modern Democracy?

The political debate in both Europe and the USA today really centers on an issue that the framers of our constitution and those who framed the rules by which the democracies in Europe operate never considered including because the issue never occurred to them.

In the 1930s a new modern economic theory was used to help the USA (and the world) mitigate the effects of the world wide recession/depression.  Keynesian economic theory advocates a mixed economy — predominantly private sector, but with a moderate role of government and public sector.  This mixture envisions times when the government borrows from its citizens (and today the whole world) to stimulate the economy and implicitly also envisions good times when these loans are paid back.

In practice this happened pretty well from the 1930s to perhaps the 1970s but sometime after that things began to fall apart.  Here is a graph that shows that history (admittedly, it is unfair as it is not show with respect to GDP nor on a log scale) –

USA deficit 1930 - 2010  Click to Enlarge

USA deficit 1930 – 2010
Click to Enlarge

 

The question that I pose today is whether this is the central failure of modern democracies?

Since that is intentionally provocative, let me explain and limit it as best I can.

Any economic entity that borrows sometimes and pays back others has been common for a very long time.  What is different today in the USA and has happened other places and at other times is the strong borrowing without really a commitment or understanding about what it means to pay this borrowed money back.

Now to the core of what concerns me.

Modern democracies elect representatives on the basis of their ability to adjust broad expenditures and policies to help the people that elected them.  Sometimes they do this on an even broader basis and help all of the citizens or even all of the people in the world  (e.g. national defense or support for the United Nations are examples of each).  But more often the legislatures operate more “partisan” than altruistic.

Today the USA constitution has no provision to protect the economic rights of generations to come.  It is possible to borrow money today and require that people who are not yet born to pay back these loans that allow people today to live better by forcing (implied) burden on those who have no representation.

In the past, I am sure if you asked Jefferson, Hamilton, Franklin, Adams or Washington if this seems fair they would say no.  My intuition is that they would not even understand the question without some extensive explanation of what was implied and what was envisioned.

So the question now is … Do we need to add another rule to modern democracies?

And if so, how do we do this in a way that leaves us with some financial flexibility in the short term, while requiring fairness to future generations in the long term?

By the way, the same thinking applies to all arguments surrounding CO2, global warming, environmental sustainability.

All of these are very thorny questions.  There are even some people who argue that humans as a species are not evolved to be able to make good decisions along these lines!

Posted in Essays, Green Perspectives, Investing, Spiritual Threads

  1. Uwe says:

    Frank,
    all good questions!
    Let me pull the question about too heavy lending into the electronics domain: What do we do if a circuit oscillates we don’t want to do it? We implement an element of damping.
    This now transferred back to the monetary markets would be a tax on financial transactions (sometimes called Tobin tax). This can be very low (some 0.1%) because it is not meant to make a profit from it, but to dampen the excessive borrowing and spending which is no longer attached to real values, not even intangibles as brand value etc.
    If implemented worldwide this tax would be fair (every company, bank or government has to pay it) and could be used for developing the “third” world i.e. by paying for education of the poor people.
    Considering you original question of governmental deficits, this would help as well as it would add a premium to the interest rates which seem too low at some times, hence helping to increase deficits. If one adds an asymetric component (re-paying debt costs nothing, raising new debt undergoes the Tobin tax) it could be even more beneficial.
    The second positive effect would be on all monetary “instruments” which are just for speculation like short selling or mis-used hedging. I still like the “Global Marshall Plan” initiative in this respect, although it seems that it has become a bit slow during the last years (www.globalmarshallplan.org).

    This is only one component, but more would lead us into the discussion what economic system is fair to everyone, leading quickly to Utopia.

    Best, Uwe

  2. Michael Hay says:

    Frank,

    I always look forward to reading your monthly posts. Your life story gives me inspiration and hope (the American dream thru the freedoms our founders gave us). I only hear the USA politicians concerned with paying the interest and never the principal on the money they borrowed. How in the world will it ever be paid back?

    Borrowing money is fine if there is something to show for it. It seems the USA’s borrowed money is gone with nothing to show for it. It just doesn’t make sense.

Leave a Reply