Beautiful & Bankrupt
By Tibor Machan - August 05, 2010

My favorite place to live in America is California. But don't get me wrong – one size does not fit all. And how wonderful that is, that people differ so much that they could be quite happy living in very different places, some in Miami, some in Houston, some in Cleveland, and some in the San Francisco Bay area. I love this since it helps to confirm my individualist position about human social life.

On a recent visit to Portugal, near Lisbon and right off the Atlantic Coast, I rediscovered that country after having been away from it for 40 years. And it comes across very different now from what it was back then. Most surprisingly it comes across to me like, well, California. Not only is its coastal weather relatively mild and dry but the place is teeming with attractive neighborhoods – not to mention notable history – of all kinds.

Most noticeably, for someone just there for a few days, is how polished is Portugal's infrastructure. The roads are spic and span; everything is squeaky clean; trains run on time, more or less, and so forth and so on. All in all Portugal looked to me well cared for, again kind of like much of California. (To know what I mean, one needs to check out the hundreds of California junior and community colleges, most of which are built like architectural wonders.)

And, sadly, Portugal and California share something else that's not to be lost sight of: they are utterly broke and in deep, deep debt. Children and grandchildren in both lands are at this point on the hook for billions to pay back or must ready themselves for defaulting on the debt and having their credit rating destroyed. Unless some angel shows up to rescue these admittedly attractive, appealing communities, their populations are knee deep in trouble. Businesses will flee and are already doing so in droves.

Countries, communities of all sorts, have gotten themselves into this mess by politicians promising the sky to everyone and making good on their promises by way of fathom resources. We know about this from many of our own experiences and those of our friends and neighbors. (I am no exception at all, what with having refinanced my home several times so as to fulfill the dreams of some of the members of my family and then ending up "upside down," so much so that the notion that I might retire some day simply cannot be entertained – I will have to die "in office.")

In the past the dire predictions of sensible economists could be met by reminding them that people tend to edge up to the brink of economic disaster but then start to contain themselves radically enough so as to avoid plummeting to ruin. But while this holds reasonably surely in most people's private lives, public finance follows different patterns. The tragedy of the commons kicks in and instead of seriously changing from irrational enthusiasm toward caution prudence, public officials – politicians, their cheerleaders, bureaucrats and the rest – get caught up in the spirit of the ponzi scheme, trying to escape the burden of intolerable debt by way of dumping it on someone else, some other institutions, hoping this will avoid having to face the music at any time.

But it seems this scheme just has run its course in most welfare states, and near and far off future generations will have to suffer. I do not see a way out unless the citizenry of these countries and communities assumes, voluntarily, a hard line stance in favor of austerity. Is that likely? I do not sell people short and very often they do get it right in a pinch but it could also turn out that the financially failed states such as California and Portugal – and a whole lot of others–will have to undergo some very hard times and perhaps the rule of some dictator who will distribute the burdens according to his or her lights, never mind fairness or justice.

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