Saturday, July 02, 2011

July 4, 2011: The Cycle of Dependency and the Atrophy of Self-Reliance

The 4th of July marks the birth of the nation, and as such is a good time to distinguish between the nation and its Central government, the Savior State.

The 4th of July is a fitting day to ponder the reality that we are at Peak Government, and the Savior State is unsustainable. This is a matter of accounting: no nation can spend more than it generates in surplus real output forever. What goes unremarked is the intrinsically destructive nature of our rising dependence on a Savior State.

In his book Collapse of Complex Societies, anthropologist Joseph Tainter identified two causes of economic collapse: investments in social complexity yield diminishing marginal returns, and energy subsidies, i.e. cheap, abundant energy, decline. In my terminology, the dynamic he describes is one in which the cost structure of a society continues rising due to “the ratchet effect” but the gains from the added expenses are increasingly marginal.

At some point the additional costs, usually justified as the “solution” to the marginal returns problem, become counterproductive and actually drain the system of resilience as dissent and adaptability (“variation is information”) are suppressed. This feeds systemic instability: on the surface, all seems stable, but beneath the surface, the potential for a stick/slip destabilization grows unnoticed.

Cheap, abundant energy offers a surplus of value that can be invested in social complexity and consumption. Once the cost and availability of energy declines, then that surplus shrinks and can no longer be used to support the high cost structure.

The U.S. economy has clearly been driven to the cliff edge of instability by both dynamics: the cheap, abundant energy which enabled fast growth of consumption and high cost social complexity is vanishing, and the cost structure of the economy has ballooned far beyond sustainability.

To recount two previously mentioned examples: the “best of the best” fighter aircraft that cost $56 million per plane only a few years ago is being replaced by a new aircraft that costs $300 million each. Medicare/Medicaid and other healthcare costs are growing at two to three times faster than the underlying economy, and now consume twice as much per capita as any other developed nation. The "solution" offered by the Status Quo is a horrendously costly layer of additional complexity which doesn't even address the key issue that we spend twice as much as other developed nations for arguably poorer care.

Put another way, the institutions that were intended to solve society’s big problems slip into self-preservation, and thus end up adding to costs and problems alike.

Jared Diamond’s book Collapse: How Societies Choose to Fail or Succeed argues persuasively that environmental mismanagement plays a key role in social instability and collapse. Some of the key factors include the relative fragility of the ecosystem, the human population’s demands on the carrying capacity of the environment, and the ability of social institutions to effectively problem-solve ecological overshoot.

In my analysis, there is a third dynamic that causes societies to cycle through growth, stasis and decline: an unremarked cycle of rising dependency on the Central State for direction, distraction and the essentials of life.

One example of this is the Roman Empire, which experienced an atrophying of enterprise and innovation as the Empire increased taxation on its remaining productive enterprises to fund the Empire’s high cost structure. To quell dissent, the Empire pursued a dual strategy of increased political oppression and placating the increasingly dependent lower classes with "bread and circuses," literally distributing free bread and free entertainment to roughly 40% of the population of Rome. Both of these strategies required additional expenditures of treasure, even as they suppressed the dissent and adaptation (i.e. the information in variation) that might have led to a successful “ratchet down” transition to a much less costly and sustainable decentralized structure.

This "Savior State" also creates a third pernicious dynamic: as dependence on the Central State rises, self-confidence and self-reliance both decline, sapping the populace of the confidence and drive needed to meet the challenges of diminishing returns and higher energy costs.

We can visualize rising dependence on the Savior State and declining self-reliance on a see-saw: as dependence rises, self-confidence and self-reliance must fall.

What ensues is a classic destructive dynamic of co-dependence in which the supplicants demand ever more “bread and circuses” even as their resentment over their dependent status rises unabated. The Central State eventually taxes the productive citizenry into penury, as the poor are now completely dependent on the Savior State and the wealthy escape taxation via bribes and favoritism.

It seems clear to me that the U.S. is in the final stages of just such a dependency cycle that will end in the implosion of the Central Savior State as its obligations far exceed the economy's ability to generate surpluses on that gigantic scale. Though the Central State can always print money, this artifice doesn’t “fool Mother Nature” for long; it doesn’t matter how many zeros are printed on the paper, the product will still cost the same in terms of energy consumed and hours of labor.

The end result of money-printing that is unsupported by actual surplus generated by the economy is the government sends out checks for $1,000 every month in accordance with its obligations but that sum only buys a single loaf of bread. You cannot fool Mother Nature by printing bits of paper and claiming they are a future claim on real goods and services unless the extra money is based on additional surplus being added to the system.

This dynamic leads to an environment in which citizens expect jobs, healthcare, housing, education, etc. from a Central State whose cost has already exceeded the carrying capacity of the economy. As cheap, abundant energy disappears, then the Central State loses a key subsidy of its bloated complexity. As the State’s fiefdoms devote their remaining energy to self-preservation at the expense of taxpayers or other government fiefdoms, the problem-solving potential of these institutions drops below zero: not only can they not solve any pressing problems, their “ratchet effect” efforts at self-preservation actively create new layers of problems and costs which push the State closer to insolvency.

Rather than wait for the Savior State to renege on its impossible promises, this site suggests pushing the see-saw in the other direction: boost self-reliance and self-confidence and lower dependence on a Savior State doomed by unfavorable demographics, high cost structure, failed institutions and rising energy costs.

Rome offers us a plausible model for the devolution of the Savior State. While a sudden collapse similar to the Soviet Union is always possible, I suspect the U.S. Central State will devolve in parallel with the ancient Roman Empire: as the Empire's costs exceeded the surplus generated by its remaining taxpayers, it issued flurries of edicts to the far-flung provinces, demanding more treasure and imposing ever more regulations.

The edicts from Rome were simply ignored. In Yeats' phrase, the falcon no longer heard the falconer. Enforcement is expensive, and if the gains reaped by costly enforcement are marginal or negative, then soon the issuers of the edicts ignore them, too.

On this 4th of July, the idea that the Savior State could slip into irrelevancy is far-fetched indeed, as the Central State is currently at Peak Government: intrusive, invasive, all-controlling, even as it plays the role of benign Sugar Daddy issuing trillion-dollar bailouts to banks, trillion-dollar props to the stock market, food stamps and Section 8 to the poor, Medicare and Medicaid to the sickcare cartels, Social Security to tens of millions of retirees, unlimited funding to the National Security State and its Global Empire, and all the other programs funded with its $4 trillion budget ($3.8 trillion officially, but don't forget the hundreds of billions in off-budget "supplemental appropriations") and its $1.6 trillion annual deficit, fully 11% of the nation's GDP.

Perhaps it is time to think of the government not as our Savior but as the guarantor of the Constitution. Peak Government is like Peak Oil: most will deny it is even possible until it's happening. We are probably a few years away from a true scarcity of oil and also a few years away from the realization that the Savior State's $100 trillion in promises cannot be met by "fooling Mother Nature" with paper and promises. But that day is coming, and perhaps we will be more cognizant of this reality on July 4, 2015.

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