International Debt Relief: Feeding the Dead Hand of Socialism
Did socialism die with the fall of the Berlin Wall and the dissolution of the Soviet Union? The world would be a better place if it had, but sadly, it did not. Socialism is alive, even if it is less hearty than it once was. Socialist energies and arguments have been redirected. Few people argue any longer for the complete socialization of economic activity. Some measure of free markets and private property is almost universally accepted.
The central concern throughout the history of economics has been to explain why private property and free markets are economically superior to politically restricted property and controlled markets. Since 1995, the Heritage Foundation has published the Index of Economic Freedom. This index ranks nations throughout the world according to the economic freedom their citizens possess, and then relates those rankings to actual economic performance.
The wealthiest nations in the world are those that have possessed a high degree of economic liberty for an extended period of time. The most rapidly growing nations are those whose populations enjoy the greatest economic liberty. A wealthy nation, however, may begin to place restrictions on economic liberty. The more it does so, the slower will be its rate of economic growth. A wealthy nation can endure a fair period of poor economic performance and still remain among the world’s elite, even if its position is slipping. A poor nation that embraces economic liberty may remain poor for some time, despite having a high rate of economic growth.
The amount of time required to make a significant difference can be no more than a generation. The difference in growth between the most free and least free nations is about four percentage points a year. Consider the impact of just half that difference, the difference between growing at one percent and three percent per year. Current per capita income in the United States is approximately $25,000. If $25,000 grows at three percent for thirty years, it becomes $60,700. The same $25,000 at one percent for thirty years only grows to $33,700. Moreover, $15,000 growing at three percent would become $36,400 after thirty years. A fast growing underdeveloped nation could overtake a slow growing advanced nation within a single generation. Alternatively, a slow growing developed nation could lose a lot of ground after only one generation. If you doubt the arithmetic, just look at what happened to Argentina during the early 1900s.
Argentina is in a crisis once again. This time the situation involves the possibility of debt default, and the austerity measures that the government might have to impose in an effort to prevent that default. Where Argentina is today, Mexico, Thailand, and Indonesia, among others, were a few years ago. And other nations will surely be in similar positions in the coming years.
What is going on here? Why is one government talking about maintaining the solvency of another government? Why are governments concerned about solvency and debt anyway? If there are commercial enterprises in other nations that want to borrow from American banks, and if those American banks are willing to lend, by all means let them do so. This is business as usual. But how, and why, do national governments get involved?
Governments may guarantee loans, or even undertake the borrowing themselves. Such international agencies as the World Bank and the International Monetary Fund are nothing but consortiums of governments playing at the banking business with other people’s money. In either case, we are witnessing the economic inefficiencies of semi-socialistic regimes. Collectively sponsored financial institutions will never work as well as privately sponsored institutions. Defaults will be higher; returns on investment will be lower.
Adam Smith is widely regarded as the founder of modern economics based upon his authorship of The Wealth of Nations that was first published in 1776. In another book, Lectures on Jurisprudence, Smith noted that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course arrest the progress of society.” Smith’s three requisites seem easy enough to accomplish. The problem is that they require political officials to occupy the background and not the foreground of economic attention and admiration. If left in the background, bureaucrats would not get to jet around the globe to deal with financial crises. There would be no such crises with which to deal. While debt default is always a misfortune for creditors, what is even more unfortunate is the prominent role that governments play in these financial matters. The world needs more economic freedom, not an ever-increasing expansion of governmental intervention, regulation, and financially imprudent restrictions on property and the marketplace.