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Acknowledging the Arrival of Peak Government

Zero Hedge, 15 May 2012

Most informed people are familiar with the concept of Peak Oil, but fewer are
aware that we’re also entering the era of Peak Government. The central
misconception of Peak Oil — that it’s not about “running out of oil,” it’s
about running out of cheap, easy-to-access oil — can also be applied to Peak
Government: It’s not about government disappearing, it’s about government
shrinking.

Central government — the Central State — has been in the expansion mode for
so long that the process of contracting government is completely alien to the
nation, to those who work for the State, and to those who are dependent on the
State. Thus we have little recent historical experience of Peak Government and
few if any conceptual guideposts to help us understand this contraction.

Peak Government is not a reflection of government services or the millions of
individuals who work in government; it is a reflection of four key systemic
forces that drove State expansion are now either declining or reversing.

The Four Key Drivers of State Expansion

The twin peaks of oil and government are causally linked: central
government's great era of expansion has been fueled by abundant, cheap
liquid fuels
. As economies powered by abundant cheap energy expanded,
so did tax revenues.

Demographics also aided Central States’ expansion: as the
population of working-age citizens grew, so did the work force and the taxes
paid by workers and enterprises.

The third support of Central State expansion was debt, and more
broadly, financialization
, which includes debt, leverage, and
institutionalized incentives for speculation and misallocation of capital. Not
only have Central States benefited from the higher tax revenues generated by
speculative bubbles, they now depend on debt to finance their annual
spending. In the U.S., roughly one-third of Federal expenditures are borrowed
every year. In Japan — which is further along on this timeline, relative to
America — tax revenues barely cover social security payments and interest on
central government debt; all other spending is funded with borrowed money.

The fourth dynamic of Central State expansion is the State’s
ontological imperative to expand. The State has only
one mode of being, expansion. It has no concept of, or mechanisms for,
contraction.

In my book Resistance, Revolution, Liberation: A Model for Positive
Change
, I explain this ontological imperative in terms of risk and
gain. From the Central State’s point of view, everything outside its control
poses a risk. The best way to lower risk is to control everything that can be
controlled. Once the potential sources of risk are controlled, then risk can be
shifted to others.

Put another way, once the State controls the entire economy and society, it
can transfer systemic risk to others: to other nations, to taxpayers, etc.

In effect, the State’s prime directive is to cut the causal connection
between risk and gain so that the State can retain the gain and transfer the
risk to others. The separation of risk from gain is called moral hazard, and the
key characteristic of moral hazard can be stated very simply: People who are
exposed to risk and consequence act very differently than those who are not
exposed to risk and consequence.

Every time the Central State guarantees something, it disconnects risk from
consequence and institutionalizes moral hazard.

To take but one example of many, when the Central State guarantees mortgages
so lenders and originators cannot lose and the borrower can’t lose more than his
modest 3% down payment, then everyone in the chain is encouraged to pursue risky
speculations because the State has disconnected risk from the consequence of a
potentially large loss. The risk hasn’t vanished; it has simply been transferred
to the taxpayers, who absorb the inevitable losses that result when speculation
is encouraged.

Separating risk from gain inevitably generates systemic instability. The
entire credit-housing bubble can be seen as proof of this dynamic.

All four of the causal factors itemized above are turning against continued
expansion:

  • The key energy source of global transportation, liquid fuel, is no longer
    cheap and easy to access.
  • The demographics have reversed as the population of State dependents is
    soaring.
  • Debt has expanded to the point that servicing that debt now threatens the
    financial stability of the State and its currency.
  • The State’s separation of risk and consequence is generating systemic
    instability.

There are plenty of models of State expansion — democracy, socialism,
communism, theocracy, and so on — and none for State contraction. This suggests
that the down slope of Peak Government will be disorderly and rife with
unintended consequences.

The Failure of Separation of
Powers

The predominant Western model of governance assumes, incorrectly, that a
“separation of powers” within the State will limit the State’s appetite for
control. But rather than limit the State’s expansion, the State’s subsystems —
the institutions of executive power, legislative power and judicial power — are
competing to gain as much control as possible over both the State itself and the
nation’s social and financial systems.

This competition doesn’t weaken or limit the State; rather, it lends the
State a fearsome competitive advantage, as each institution gains power as the
State expands. So even though the competition between the three may appear to
limit the power of each, in aggregate this competition only increases the
State’s expansion as each seeks to outdo the others in reach, influence, and
power.

Regardless of which institution wins or loses a particular squabble, the
State inexorably expands its control and power. And just as inexorably, elites
within the State — systemically protected from the risk created by their
policies — will experience a rising sense of omnipotence as their private power
rises in tandem with the State’s expansion.

These powers also offer State elites a way to radically lower their own risk
and dramatically increase their private gain by leveraging the State’s vast
powers to their own private benefit.

In other words, not only does each agency and branch of the State seek to
expand its reach and power, so, too, does every individual within the State who
can leverage the power of the State to protect his/her own individual gain.

The State as Protector of Private Gain

The Central State is granted unique powers of coercion by its membership (the
citizenry) to protect them from the predation of foreign powers, individuals,
and subgroups seeking monopoly. The citizens grant the State this extraordinary
power to protect their freedom of faith, movement, expression, enterprise and
association and to insure that no subgroup can dominate the nation for their
private gain.

Granting this power to the State creates a risk that the State itself may
become predatory. To counter this potential, the State has the self-limiting
mechanisms of a separation of powers such that no one institution or agency can
dominate the State and thus the nation.

But as we have seen, the separation of powers has failed to limit the
expansion of the State; rather, it has become a competitive advantage, feeding
the State’s expansion. There are no State-based limits on the State’s
concentration of wealth and power.

There is a great irony in this concentration of power in the State: the power
is concentrated to protect the citizenry from predation and exploitation, but
that concentration becomes an irresistible attractor for all those seeking to
increase their private gain via monopoly, cartels, collusion, fraud, and other
forms of predation.

The wealth that can be concentrated in private hands is not limited or
self-regulated, and so private concentrations of wealth inevitably exceed the
ethical threshold of individuals within the State (i.e., their resistance to
bribes and self-interest). This structural imbalance leaves the State
intrinsically vulnerable to the influence of private wealth. Once this wealth
has a foothold of influence within the State, it can then bypass the State’s
internal controls and become the financial equivalent of cancer: a blindly
self-interested organism bent solely on growth at the expense of the system as a
whole.

Rather than protect the citizens from exploitation, the State’s primary role
becomes protecting the private gains of elites who have taken effective control
of the State’s vast powers.

The Death Spiral of an Expansive State

We can now see that the Central State faces an impossible contradiction: to
pursue its primary purpose of protecting the citizenry from predation, it is
granted powers that enable it to evade its own self-limiting mechanisms. Private
concentrations of wealth gain control over the State’s machinery of governance,
and the resulting partnership of private and State elites suppress the
mechanisms that were intended to limit private influence over State power.

To enhance their own power, these elites increase the State’s reach until it
dominates the entire political, social, and economic system. This sets up an
inherently self-destructive feedback loop in which the State’s actions to
protect its self-serving elites weaken both the State and the nation. The
State’s inefficiencies pressure the nation’s output, even as the State increases
its share of the national income to maintain its self-serving elites and quiet
its potentially restive dependents. The more the State expropriates, the less
surplus is left for productive investment, and so the nation’s output continues
to decline.

This dynamic creates a positive feedback loop (i.e., a death spiral) of
higher taxes and lower investment in productive assets.

Post Peak-Government Living

In Part II: The End of the Free Lunch, we consider what citizens
can do to limit their own risk as the Central State contracts.

We explain how the State has unfairly used taxpayer-funded subsidies to erode
participation commerce and investment at the local level that in ages past
provided transparency into the true value of labor.

Now that the artificial influence of these subsidies is waning as the State
can longer longer afford them, reactivating the infrastructure and processes for
enterprise at the community level will be critical to transitioning to a
sustainable and more resilient economic model.

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