November 8, 2011 Europe's Citizens Are Suffering, Why Not Its Governments? By John Tamny With each passing day there's some new headline in the financial press about an ailing European government facing "austerity", "severe cuts", and maybe default due to a mismatch between incoming revenues and outgoing liabilities. What's not explained is why this is so problematic. It's not, and it isn't in the least. Though a great deal of commentary up to this point has noted that European countries have created unsustainable welfare states, the simple explanation for the present is that with the private European individuals who prop up the State suffering difficult economic times on the way to less taxable income, so are governments wholly reliant on the taxable economic efforts of private individuals. Frederic Bastiat long ago observed that the State is the grand fiction through which wealth is redistributed to others, and with the producers hurting, so is the State's wealth redistribution machine. We can lament the growth of European governments, but shouldn't the present point be that since those whose labors support governments are getting by with much less, wouldn't it be correct if supplicant governments similarly shrink in line with the times? We keep hearing about the "painful sacrifices" governments must make in the present, but aren't those alleged sacrifices something governments should enforce with a smile along the lines of "our benefactors are getting by at the moment with much less, and so will we happily do so in deference to our funders." Governments only exist at the pleasure of those who pay for them, and their supporters are struggling right now. And what about the individuals whose economic labors produce little to no economic value, but who are reliant on the government funding provided by those who are productive? Can they say with a straight face that their benefits should remain intact while their benefactors earn less, and worse, potentially face job loss? Not commented on enough is just how obnoxious all the government wailing about a lack of funds is. It's almost childlike in that only a child lacking broader knowledge of the human condition would complain about an allowance reduction in the midst of struggles for the individual bestowing the allowance. In this case it's the limping people of Europe who provide the means for the monstrous European governments, so for those same governments to bemoan their depressed situations amid monumental difficulties for their European providers is the height of immaturity. So with governments acting in childlike ways it's time to let those same governments experience the pain of allowance cuts in concert with default if they prove unwilling to more than match the austerity presently faced by those they annually fleece. Shouldn't governments that allegedly serve at our pleasure while spending our money experience pain exponentially worse than we do during downturns? Of course as is well known, the supposed problem with governmental defaults is the latter's implications for banks. Having loaded up on government debt with regulatory approval (yet another reminder of the sheer absurdity of more regulation as the path to financial health), many face bankruptcy if governments foist on them payment haircuts. If so, it's time we experience a few bank failures so that we as individuals realize that the day after will still come, and with it, economic productivity. Not for more than a century, and certainly not in modern times have banks been the grand source of credit that bailout supporters proclaim, so let's allow one or many to go under for having committed the egregious error of betting the farm on government debt. The naysayers will bleat endlessly about "counterparty risk" and a "collapse of the financial system", but in truth, we'll just see the collapse of the entities that erred in assuming governments don't default. As for counterparty risk, that applies in all areas of commerce among all businesses, and if a few counterparties are burned, they'll have learned a valuable, economy-enhancing lesson about spreading one's risk around. As for the banking system itself, far from ruined, it will emerge from such a scenario far healthier for poorly managed institutions being swallowed by better managers. And with economy-sapping bailouts off the table, the smaller banks that the left naively seek through regulatory force will become an un-coerced market reality. Regarding the debt environment governments will face in light of default, those who lean right should be as excited about that every bit as much as the left will cheer smaller banks. Indeed, while default will by no means shut governments out of the debt markets altogether, the cost of borrowing for governments will surely rise. This on its own will ensure governments that are smaller and happily less consequential, plus the investors who shun government debt altogether will find other, growth-oriented endeavors to allocate capital toward. As this is being written Europe has governments operating solely with resources taken from others that are unwilling to downsize despite massive deleveraging among the individuals who provide them with funds. Juvenile as it sounds, that's rude. Since governments seemingly won't take the hint, it's time that the citizenry on which they rely allows them to default. That Europe will get better run banks and smaller government in the process will be an added bonus for the productive in Europe reminding governments from whence their funds actually come. my ps the US is in the same situation.