Tocqueville's America No More.

May 10, 2011

Major market indices were higher last week. The DJIA gained 2.44%, the S&P 500 climbed 1.96%, and the Nasdaq added 1.89%. Growth stocks outperformed value stocks. And the small cap index added 2.32%. The 10-Treasury yield closed 11 basis point lower at 3.29%.

There is a little known economic concept entitled the "Rahn Curve." Its premise is simple: as government spending exceeds a certain percentage of GDP, real economic productivity declines.

Government produces nothing. And it often moves capital from more- to less-productive areas of our economy as it seeks to equilibrate the vast landscape of a nation's natural imbalances.

The irony is this: we already employ the best system ever created for the efficient deployment of capital. A system that deploys capital to those areas where it is most required. To those areas where it will be most productively expended.

That system? Free-market Capitalism.

Capitalism rewards players for efficient usage of assets with profits and opportunity. It dissuades players from using capital inefficiently by eroding their opportunities to do so in the future. By setting them back financially.

Capitalism played well? More capital. Capitalism played poorly? Less capital. A perfect system? Of course not. But much better than any other existing economic model.

But, with S&P's recent downgrade of the U.S., and no will to curb the social benefits programs that Americans are increasingly accepting as a God-given birthright, there may be little chance of avoiding the storms ahead.

Would everyone like to see social security and healthcare for everyone? Of course. Would everyone like to find gold at the end of the rainbow? Of course.

Alas, we have no choice but to make decisions concerning the allocation of scarce resources based upon the limited scope of those resources.

Crooks may be able to hack into an ATM machine and gain access to its cash reserves. That does not mean that the entire neighborhood can create a lifestyle upon the fallacy of that ATM's infinite generosity. Eventually, the machine runs out of cash and the neighborhood is right back where it started.

Tocqueville recognized the values, behaviors and ideas that made American great long ago.

Unlike the aristocratic ethic of Europe, America was a society where hard work and money-making was the dominant ethic. Where a common man could aspire to greatness. And in so doing, enjoy a level of dignity unprecedented in Europe. Never having to defer to elites.

In America, the system was not about government. It was about the individual. And thanks to free-market capitalism, the individual's effort could take him as far as he could go.

Today? Tocqueville would not recognize modern-day America. An America that likes to borrow and spend. An America that shuns saving. An America that expects the government to bail it out of any and all unpleasant situations.

Your grandparents would have rather gone without, than to accept a handout. Today? Handouts, bailouts, or get out, Mr. Politician. Our sense of entitlement risks overwhelming our senses of accomplishment, accountability and work ethic.

Our culture of American exceptionalism risks being overrun by a culture of entitlement. A culture where everyone takes, but few create..

Whereas the founding fathers harbored an inherent mistrust of government, today we all turn to the government, eyes wide, and ask what the government can do for us.

All of this will lead to much higher taxes. There is no alternative.

The Nanny State costs money. And we have 77 million Baby Boomers for whom we'll soon need to care. Yesterday they were producers. Tomorrow, they'll be recipients.

In 1960, the U.S. had 5.1 workers contributing to the support of every social security recipient. The Social Security Administration estimates that by 2035, there will be 2.1 contributors for every recipient.

Most diligent, hardworking couples can barely afford to support their families. Now we have to support 77 million Baby Boomers for the next 40 years? And the Social Security Trust is already running a deficit?

When individual had to create their own opportunities, we did. When the government begins to provide handouts, the creation of opportunity does not seem to urgent. And the less that muscle gets exercised, the weaker it becomes.

At some point, when the moral and cultural underpinnings of the United States have withered down to nothing, there will be no alternatives. A European-esque welfare state will attempt to take care of the young, poor, elderly and infirm, not to mention the unemployed, unmotivated, and unaccountable.

And it will do so until it cannot.

Eventually, S&P will further downgrade U.S. Treasuries. Our creditors will stop purchasing our debt. They may even sell. The government will have less to spend on its programs. The cost of servicing our debt will increase. The Fed will be forced to acquire more Treasuries, causing the dollar to decline, and inflation to rise. Taxes will shoot up. Parts of society will be hit particularly hard, leaving other parts to work even harder in order to pay more taxes. Soon, the producers will begin to run out of reasons to produce.

And as the government allocates more capital (via taxes), that will represent more capital put towards less efficient usage than it otherwise might have been. So deepening the hole in which we will live.

Soon, Tocqueville's America resembles the Europe from whence he came. Higher taxes. Higher unemployment. Lower productivity. Higher expectations as to what the
government should do. Conversely, lower expectations for ourselves. Our children. And theirs. Stay tuned...

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