The bursting of the Regulatory State Bubble

In May 1939 as storm clouds of war built over Europe, an astonishing archaeological find was unearthed at Sutton Hoo, on the east coast of England. A Dark Age King's tomb was excavated, providing a window into the world of the pagan kings of old.

Rædwald was the most powerful of the many kings ruling various pieces of the old Roman province of Britannia. The Legions had been recalled to protect the Eternal City itself, two hundred years before, triggering a "land grab" by Germanic barbarians.

Britannia was rich, and weak. Long used to protection by the Roman Army, the peoples were easy pickings for increasingly large bands of roving barbarians, who eventually settled down as conquerors. Rædwald's horde showed how a king gathered and maintained power in those brutal days. Basically, it was a Ponzi scheme.

Kings of this day were Ring Givers, as described in Beowulf and echoed in J.R.R. Tolkien's novels. Simon Schama writes about how the system worked in his A History Of Britain:

Their political power rested on the spoils of war and on the unwritten custom of the clan. The blood feud and the inhumation of bodies were standard practice among them. This does not mean, however, that the early Anglo-Saxon kingdoms were places of sub-human brutality and ignorance, perpetuated by thugs in helmets. War was not a sport; it was a system. Its plunder was the glue of loyalty, binding noble warriors and their men to the king. It was the land, held in return for military service, that fed their bellies; it was the honour that fed their pride; and it was the jewels that pandered to their vanity. It was everything.

To keep a large kingdom's fighting men in booty, you had to fight a lot. You also had to fight smart - a king that loses a lot of battles loses his men's loyalty and ultimately his life. The chronicles tell us that the Merovingian boy king Sigebert wept in his saddle as his army was routed. That's what led to the Mayors of the Palace becoming the war leaders and Ring Givers, and that led to the replacement of the Merovingians by the Carolingians. You might say that the Merovingian bubble burst.


Risk vs. Reward is a calculation that a king had to become good at. But the easiest pickings always went early, and so over time the risk increased and the reward decreased. Eventually there wasn't enough plunder to keep the system going.

The modern Regulatory State has a more subtle (and less brutal) method of getting plunder, but at its heart the system is the same: politics is still about feeding bellies, vanity, and pride. Regulations need Regulators, which gives ample opportunity for patronage. New regulations can be crafted with the help of powerful allies, which gives ample opportunity to flatter egos and let them show their followers that they too can deliver results. Plunder must be distributed, even it it takes the form of intellectual booty.


Some of this takes the form of filthy lucre. The "Stimulus" program is notorious (and unpopular) because the bulk of the payouts are going to the public employee unions. Thanks for all your support, guys - now that we've conquered the kingdom, we're looting the treasury for you.

Obama the Ring Giver.

The problem is that the dynamic facing Obama is the same that faced Sigebert: the easy plunder is gone. The battles he must fight have become much harder, and the payoff for winning is much lower. And it's not just him. The dynamic driving the Regulatory State is strained to the limit. Consider the big, early wins of the Regulatory State:

• The Pure Food and Drug Act of 1906. People were dieing because of poisoned food and snake oil patent medicines. This act required labeling, which made it possible for the consumer to choose which product to buy.
• Social Security (as originally envisioned, i.e. a minimal safety net against destitution). Essentially a nation wide insurance policy against starvation in your old age, it was very low cost (contrast with today's system).
• The European Economic Community which took the first steps into turning western Europe into a Common Market.
  

But even here, the trajectory is apparent: lower rewards, higher costs. From keeping citizens from being poisoned to a moderate rationalization of tariff levels. Big gains lead to modest gains lead to poor gains. You can see the trajectory even within individual areas of the Progressive agenda over time:

• Women's rights, from the Vote (1920) to employment opportunities (1960) to "feminism" which has become unpopular, even with young women.
• Environmentalism, from the National Park system (1916) to the Air Pollution Control Act (1955) to the Superfund act to Cap and Trade.
• Unions, from Dickensian Mills to the right to organize to public employee unions.
  

The early gains are always at the beginning. Always. This makes it hard for Obama and his intellectual brethren in Europe; just as Valéry Giscard d'Estaing is no Jean Monet, Obama is no Teddy Roosevelt. They can't be - the easy wins are already gone. Just as Rædwald had to fight tougher opponents than the soft Romanized Britons, Obama and the folks in the EU have bigger challenges than their predecessors.

They have to, if they are to be Ring Givers. Money, pride, and vanity are on the line today just as they were in the seventh century. The battles are bigger (European Constitution, Health Care Reform) because that's the only way to satisfy the requirement for money, pride, and vanity.

Where does the money come from? As the programs have gotten bigger and more expensive, governments have turned increasingly to deficit spending. While politicians like to talk of this in terms of "making an investment", it's nothing of the kind. It's consumption. For a long time it was assumed that low levels of deficits (2-3% of GDP) could be tolerated, or were possibly stimulative. But remember that trajectory: programs get bigger over time, and so do deficits. The balloon swells.

The US government next year will borrow 42% of what it spends. Europe is as bad: Greece's government deficit is 13.6% of GDP; Ireland is even worse, and Spain and Italy are not far behind. And so to the bubble.

The Euro has been "saved" by a Trillion dollar cash infusion. Where did the money come from? Government loan guarantees, or direct cash infusions via the IMF. But that begs the question of where the cash infusions came from, if all the governments are running deficits? More borrowing.

The Regulatory State has led us, step by step, vanity project by vanity project to a massive bubble of Sovereign Debt. Like someone who refinanced their house to take a vacation, the industrialized world is facing a crisis caused by a dynamic that Rædwald understood: the need for rulers to cater to their supporter's money, pride, and vanity.

When this bubble bursts, collapsing governments (hello, Greece) will take down other governments that loaned them too much. As those governments collapse, they will take down other governments. Once government bonds look to be junk status, the interest rates will rise to ruinous levels, straining even the less profligate governments.

What happens when there's nobody left to bail the Progressive States out? In Greece it's rioting in the streets and firebombs lobbed at businesses. In the US, there are already mutterings about the Fed.Gov seizing 401(k) accounts. In none of the countries will the Progressive State be able to provide the service level that they've promised. In many states, the government won't even be close to what they've promised. Social Security will look precisely like the Florida Real Estate market.

I'm terribly pessimistic about what's going to happen over the next decade (or maybe two). Europe's further down this road than we are, but international financial crises are contagious, and I simply don't see the intellectual capacity on the left to deal effectively with this. The Tea Parties will put a break on things here, but we're going to take serious damage from the collapse of Europe. I hope that I'm wrong, but it's all too easy to see Obama as Sigebert, not knowing what to do, weeping in his saddle at the route of his armies.