Life in a Banana Republic
By Arnold Kling
A banana republic is a country where government obligations swamp total wealth. In a typical banana republic, wealthy individuals race to move their savings overseas to safe havens. Those who fail to do so will suffer from taxation, inflation, and currency devaluation.
There is a term in economics called “Ricardian equivalence.” The idea is that people incorporate government obligations into their personal balance sheets. Imagine that you were the only citizen of your jurisdiction. The government borrows $1000 and gives it to you. Has your net wealth gone up? Obviously not, since when it comes time for the government to repay the debt, the only citizen who can do it is you. If you believe in Ricardian equivalence, then there is no such thing as fiscal stimulus.
In practice, when government borrows and spends, the people who receive the money know who they are better than the people who are going to have to pay it back. That is why fiscal stimulus works…supposedly.
I see the U.S.government incurring many more obligations over the next few years.
–the recession will lower tax revenues and increase spending on things like unemployment benefits. These were known as “built-in stabilizers” back when I was first learning macro.
–the Troubled Asset Relief Program was originally billed as a way for taxpayers to invest in undervalued mortgage assets in a reverse auction and make a profit. So far, not one cent has been spent on buying undervalued mortgage assets in a reverse auction. It seems likely that the program will be, or already has been, transformed into a pure spending program. Personally, I was never a fan of buying mortgage securities. But if we’re not going to do that, the honest thing to do would be to repeal the bill that passed in September and pass a new bill.
–The stock market crash has hit state and local government pension funds as well as those of us trying to save for retirement. The assumption has to be that there will be a full Federal bailout of the state and local pension funds, which ultimately has to be paid for by taking money away from those of us trying to save for retirement.
My point is that sooner or later the U.S. government is going to have to get serious about stripping the assets of those of us who have tried to live within our means. Sooner or later, the profligate are going to take from the prudent, the grasshopper is going to confiscate the property of the ants.
If you’ve got wealth, you need to find a haven for it. You don’t want to keep it in a banana republic for too long.