DRI-315 for week of 4-20-14: Is GDP NDG in the Digital Age?

An Access Advertising EconBrief:

Is GDP NDG in the Digital Age?

For years, we have heard the story of stagnant American wages, of the supposed stasis in which the real incomes of the middle and lower class are locked while the rich get richer. Various sophisticated refutations of this hypothesis have appeared. Households have been getting smaller, so the fact that “household income” is falling reflects mainly the fact that fewer people are earning the income that comprise it. “Wages” do not include the (largely untaxed) benefits that have made up a steadily larger share of workers’ real incomes ever since World War II.

But there is something else going on, something more visceral than statistics that leads us

to reject this declinism. It is the evidence of our own senses, our eyes and ears. As we go about our daily lives, each of us and the people around us do not exhibit the symptoms of a people getting materially worse off as we go.

For over thirty years, we have been forsaking the old broadcast trinity of network television stations, at first in favor of cable television and recently for a broadening array of alternative media. For over twenty years, our work and home lives have been dominated by desktop computers that have revolutionized our working and personal lives. For over ten years, an amazing profusion of digital products have taken over the way we live. Cell phones, smart phones, tablets, pads and other space-age electronic wonders have shot us out of a consumer cannon into a new world.

Can it really, truly be that we are worse off than we were before all this happened? As the late John Wayne would say if he were here to witness this phenomenon: “Not hardly.”

The pace of this technological revolution has not only been too fast for most of us to stay abreast of it. It has left many of our 20th century institutions blinking in the dust and gasping for breath. Mainstream economic theory and national income accounting, in particular, are trying to gauge the impact of a 21st-century revolution using the logic and measurement tools they developed in the first half of the 20th century.

The Case Study of Music

Music was one of the great consumer success stories of the 20th century. Thomas Edison’s invention of the phonograph paved the way for the recording of everything from live artistic performances to studio recordings of musicians and singers to the use of recorded sound tracks for motion pictures. The recordings themselves were contained on physical media that ranged from metal discs to vinyl to plastic. At first, these “records” were sold to consumers and played on the phonographs. Sales were in the hundreds of millions. Artists included some of the century’s most visible and talented individuals. The monetary value of these sales grew into billions of dollars.

Since recordings were consumer goods rather than capital goods, sales of records were recorded in the national income and product accounts. Or rather, the value added in the final, or retail, transaction was included. The value-added style of accounting was developed with the inauguration of the accounts in the late 1930s and early 40s in order to do three things: (1) show activity at various stages of production, but (2) highlight the new production of consumption goods each year to reflect the fact that the end-in-view behind all economic activity is consumption (3) by including only the additional value created at each stage to avoid double-counting.

As the 20th century came to a close, however, record albums were replaced by small audio discs that could be played on more compact devices. And these were soon supplanted by computers – that is, the playing medium became a computer and the music itself was housed within a computer file rather than a substantial physical object. As technology advanced, in other words, the media grew smaller and less substantial. But the message itself was unaffected; indeed, it was even improved.

How do we know that the value people derive from music has not been adversely affected by this transition to digitization? In The Second Machine Age, authors Erik Brynjolfsson and Andrew McAfee consider the question at length. In terms of physical units, sales of music have fallen off the table. Just in the years 2004-2008, they fell from roughly 800 million units to less than 400 million units – a decline of over 50% in four years! And the total revenue from sales of music fell 40% from $12.3 billion to $7.4 billion over the same period. By the standards we usually apply to business, this sounds like an industry in freefall.

In this case, though, those standards are misleading. During that same time span, the total unit-volume of music purchased still grew when purchases of digitized music where factored in. And acquisitions of music free of charge by various means swelled the total much, much larger. One of the things economists are best at is analyzing non-traditional markets, which is why Joel Waldfogel of the University of Minnesota was able to infer that the quality of music available to consumers has actually increased in the digital era. Today, anybody with a smartphone can access some 20 million songs via services like Spotify and Rhapsody. For those of us who recall the days of LPs and phonograph needles, the transition to today has been dizzying.

But the economics of the digital age have driven prices through the floor. As Brynjolfsson and McAfee observe, it is the same process that has driven the newspaper business to the wall and its readers online; the same one that has driven classified-advertising from newspapers to Craigslist; the same one that impels us to share photos on Facebook rather than buying prints for friends and family. “Analog dollars,” they conclude, “are becoming digital pennies.”

This creates an unprecedented marketplace anomaly. Measured by the value it creates for human beings, which is how economists want to measure it, the music industry is booming. But measured in dollars’ worth of marketplace transactions, which is how economists are currently able to measure it, the music industry is declining rapidly.


If the music industry were a singularity, we might treat it as a mere curiosity. It is not, of course; the gap between price/quantity product and value created yawns wide across the spectrum of industry. “By now, the number of pages and digital text and images on the Web is estimated to exceed one trillion…children with smartphones today have access to more information in real time via the mobile web than the President of the United States had twenty years ago. [!] Wikipedia alone claims to have over fifty times as much information as Encyclopedia Britannica, the premier compilation of knowledge for most of the twentieth century.”

“…Bits are created at virtually zero cost and transmitted almost instantaneously worldwide. What’s more, a copy of a digital good is exactly identical to the original… Because they have zero price, these services are virtually invisible in the official statistics. They add value to the economy, but not dollars to GDP… When a business traveler calls home to talk to her children via Skype, that may add zero to GDP, but it’s hardly worthless. Even the wealthiest robber baron would have been unable to buy this service [in the 19th century]. How do we measure the benefits of free goods or services that were unavailable at any price in previous eras?”

This understates the case. As Brynjolfsson and McAfee acknowledge, most of the new digital services substitute for existing services whose sales contribute to GDP. Thus, the digital bonanza actually lowers measured GDP at the same time that our well-being rises. In economic jargon, the effect on GDP’s function as index of national welfare is perverse.

This leads many people, including these authors, to the conclusion that GDP is no longer an adequate measure of national output. If this is true, it makes our monthly, quarterly and annual preoccupations with the growth rate of GDP seem pretty silly. The government agency whose task is the compilation of economic statistics is the U.S. Bureau of Economic Analysis. Its definition of the economy’s “information sector” aggregates sales of software, publishing, movies, audio recordings, broadcasting, telecommunications, and data processing and information services. These sales account for about 4% of measured GDP today. Yet we are commonly understood to be chest-deep in a new “economy of information” that is replacing the economy of tangible goods and services. Either this perception or that 4% metric is wrong; the latter seems vastly more probable.

What’s more, the irrelevance of GDP increases by the nanosecond.

New Products

Of course, not all digital products and services are substitutes for existing counterparts. Some of them are genuinely new. If these are similarly hard to incorporate in GDP, the distortion may be only half as great as that described above. But the digital revolution has displayed a propensity for creating things that were unknown heretofore but that soon became necessary accoutrements of daily life.

Longtime macroeconomist and textbook author Robert Gordon estimated the value of new goods and services added but missed by GDP at about 0.4% of GDP. That may not sound like much, but since the long-term average annual rate of productivity growth is around 2%, it would mean that we are overlooking 20% of annual productivity.

GDP and Investment: The Bad News Gets Worse

GDP is failing because it neglects to measure the tremendous increases in consumption and well-being conferred by the digital age. But GDP also measures investment, or purports to. Are its failings on the consumption side mitigated by its performance with investment?

No, they are magnified. The production of digital goods and services is heavily dependent on intangible assets rather than the familiar plant and equipment that are the focus of traditional investment. Brynjolfsson and McAfee identify four categories of these intangibles: intellectual property, organizational capital, user-generated content and human capital. It comes as no surprise to find that the measurement of these assets largely eludes GDP as well.

Intellectual property encompasses any creation of the human mind to which legal ownership can be attached. Patents and copyrights form the backbone of this category. A great deal of spending on research and development (R&D) constitutes investment in intellectual property.

Yet R&D has long been recognized as almost impossible to accurately measure because only its cost is transparent, while the value (e.g., capital) it creates often escapes measurement.

Organizational capital is an even broader concept intended to capture the value inhering in brands, processes, techniques and conceptual structures owned by particular businesses. This category long predates the digital age but is idealized by companies like Apple, whose brand and unique corporate style complement its portfolio of intellectual property to create perhaps the world’s most productive company. Accountants have long sought to put a price tab on things like “good will” and “brand name.” We have observed that the transition to a computer-savvy work force has necessitated investment in procedures and processes far greater than the initial spending on the computer hardware and software – spending that doesn’t show up in the national income accounts as investment.

User-generated content is a true digital innovation. Facebook, Twitter, YouTube, Pinterest, Instagram, Yelp and countless other websites are largely created by their users. The value of this approach is both undeniable and subjective, as anybody who has every previewed a restaurant on Yelp or planned a vacation with TripAdvisor can testify. The feedback generated these sites provides an object lesson in the generation of information – the kind of information that economists had to assume that people already knew because we didn’t know how markets could make it available to them. Now we do.

Human capital was a concept invented and popularized by economists Theodore Schultz and Gary Becker decades before the Internet existed. The talents, skills and training that we receive make us better productive “machines,” which inspired the analogy with physical capital.

How important are these intangible assets in the modern economy? Nobody knows with certainty, but – as always – economists have made educated guesses. Brynjolfsson and McAfee estimate the value of organizational assets as some $2 trillion. The preeminent theorist of investment, Dale Jorgenson, estimated that human capital is worth 5-10 times as much as the stock of all physical capital in the U.S. Investment in R&D has been estimated at roughly 3% of GDP in recent decades.

The degree of distortion in GDP numbers – specifically in measures of productivity, which compares growth in inputs and output – is harder to gauge in this case than in the consumption example. Some intangible assets, like R&D and human capital, are longtime thorns in the sides of statisticians; their measurement has always been bad and may be no worse now than before. In some cases, the distortions in investment may offset those in consumption, so that the measure of productivity may be accurate even though the numerator and denominator of the ratio are inaccurate. But the elements most closely associated with the digital revolution, such as user-generated content, impart a huge downward bias to measured productivity in the national income accounts.

A New, Improved GDP?

Economists and other commentators have done a good job of diagnosing the havoc wreaked on GDP by the digital revolution. Alas, they have rested on those laurels. In the “solutions and policy proposals” section of their work, they have fallen back on the tried and trite. GDP was a sibling of macroeconomics; the economic logic underlying the two is the same, with the operative word being “lying.” Macroeconomists are loathe to repudiate their birthright, so their reflex is to cast about for ways to mend the measurement holes in GDP rather than abandon it as a bad job. Hence the rosy glow cast by Brynjolfsson and McAfee over nebulous concoctions like the “Social Progress Index” and the “Gallup-Healthways Well-Being Index.” As for the touted “Gross National Index” of Bhutan, the less said about this laughable fantasy (treated in a previous EconBrief), the better.

The authors cite the comments of Joseph Stiglitz, whom they call “Joe” to profit by the implied familiarity with a Nobel laureate: “…Changes in society and the economy may have heightened the problems at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.” The “improvements” don’t seem to have included the ability to stop the scandalous misuse of the concept of “statistical significance” that has plagued the profession for many decades.

In fact, GDP has been known to be a failure almost since inception. Introductory economics textbooks routinely inculcate students in the shortcomings of GDP as a “welfare index” by listing a roster of flaws that predate the digital age, the Internet and computers. It has ignored the value of household services (predominantly provided by women), ignored the value created by secondary transactions of all kinds of used goods, undervalued services and thrown up its figurative hands when confronted by non-market transactions of all kinds. Its continued use has been a grim tribute to Lord Kelvin’s dubious dictum that “science is measurement,” the implication being that measuring badly must be better than not measuring at all.

What’s more, the blame cannot be laid at the feet of economic theory. It is certainly true that the digital age has brought with it a veritable flood of “free” goods – seemingly in contradiction with Milton Friedman’s famous aphorism that “there is no such thing as a free lunch.” Hearken back to Brynjolfsson and McAfee’s words that “bits are created at virtually zero cost.” A fundamental principle – perhaps the fundamental principle – of neoclassical microeconomics is that price should equal marginal cost, so that the value placed on an additional unit of something by consumers should equal its (opportunity) cost of production. When marginal cost equals zero, there is nothing inherently perverse about a price approaching zero. No, the laws of economics have not been suspended on the Internet.

Careful comparison of the age-old flaws of GDP and its current failure to cope with the challenges posed by digital innovation reveal a common denominator. Both evince a neglect of real factors for lack of a monetary nexus. The source of this insistence upon monetary provenance is the Keynesian economic theory to which the national income accounts owe their origin. Keynesian theory dropped the classical theory of interest in favor of a superficial monetary theory of liquidity preference. That is now proving bogus, as witness the failure of Federal Reserve interest-rate policies since the 1960s. Keynesian theory gives spending the pride of place among economic activity and relegates saving and assets to a subordinate role. Indeed, the so-called “paradox of thrift” declares saving bad and spending good. No wonder, then, that the national income accounts fail to account for assets and capital formation in a satisfactory manner.

Instead of tinkering around the margins with new statistical techniques and gimmicks when they have not even mastered basic statistical inference, economists should instead rip out the rotting growth root and branch. Reform of macroeconomics and reform of the national income accounts go hand in hand.

End the Reign of GDP

The digital age has merely exposed the inherent flaws of GDP and widened its internal contradictions to the breaking point. It is time to dump it. The next measure of national output must avoid making the same mistakes as did the founders of the national income accounts nearly 80 years ago.

The next EconBrief will outline one new proposal for reform of the national income accounts and explain both its improvements and shortcomings.

DRI-345 for week of 9-9-12: Other People’s Money

An Access Advertising EconBrief:


Other People’s Money

The elephant in the room in any political discussion is the ongoing debt crisis in Europe and the impending one in the U.S. Turn over the debt coin to reveal spending; the two go together like dissipation and death.

We strive to understand the complex and unfamiliar by likening it to the familiar. It is commonplace to read explications of government spending and debt that treat the government as one great big corporation or, worse, as the head of our national household. In fact, it is just those differences between the behavior of government and our own daily lives that give rise to misunderstanding.

In their immortal bestselling text Free to Choose (companion piece to a hit 1980 PBS series), Milton and Rose Friedman developed a beautifully concise matrix to illustrate the differences between government and private spending. Herein lies the key to the avalanche of debt poised to engulf the world.

The Spending Matrix

In a modern economy, money serves as a lubricant to the exchange of goods and services between individuals and businesses. The income received by households for supplying input services to businesses and government forms the basis for expenditure on consumption goods and services. Income not consumed is saved and invested; an excess of current consumption spending over income constitutes dissaving and is financed by borrowing to incur debt. Government “income” is derived from tax revenue and expenditure is undertaken to provide consumption and investment benefits to citizens. Once again, any excess of expenditure over income must be financed, either by money creation or borrowing to incur debt.

The Friedmans explain why the efficiency of the expenditure process depends crucially on the origin of the money being spent and the identity of the spending beneficiaries. First, they identify the four basic categories of spending. Money is the vehicle for spending. Either the money is yours (originating via income you earned) or it is supplied by somebody else via the intermediation of government, which levies taxes and gives you the proceeds. Either you are spending the money on yourself or you are spending it on somebody else. The possibilities reduce to four spending categories.

Category I denotes the case in which you are spending your own money on yourself. In this situation, spending is at its most efficient. The word “efficient” has two everyday meanings, both of which are germane here. First, you spend your own money efficiently because you have the strongest possible incentive not to spend any more than necessary for a given quantity and quality of good or service. This is so because there is nobody whose welfare means more to you than yours. (For our purposes, we can stipulate the content of “you” to include members of your household.) Second, you want to get the most value for your expenditure – that is, for a given expenditure you want to get the best quality and most appropriate items. Again, this makes sense because nobody means more to you than you.

In Category II spending, you are spending your money on somebody else. Your spending will be efficient in the first sense – you will still strive to minimize the cost of a given quality of purchases – but not the second sense. You are not obsessively concerned with value-maximization because you yourself are not consuming the goods your purchase – somebody else is. Any doubt about the truth of this observation will yield to a study of the yearly gift-return statistics during the Christmas season.

In Category III spending, you are spending somebody else’s money on yourself. Now you will strive to get the best possible value for your money, but you will not be rigorously concerned with cost-minimization because you are not spending your own money – you are spending somebody else’s money. Your utility or satisfaction depends on the goods and services you consume, so you have every incentive to acquire goods and maximize their value, but your utility in unaffected by the efficiency with which other people’s money is spent. Thus, you have no incentive to waste time worrying about it.

Category IV spending is the kind undertaken by government. Legislators spend somebody else’s money on somebody else. Consequently, they have no incentive to spend efficiently in either sense. They are not spending their own money and they do not themselves benefit from the expenditures, so their consumption is not dependent on the expenditures. Thus, legislators do not minimize the cost of purchasing a given quality of goods using somebody else’s money, nor to they maximize the value of the goods they purchase for others to consume.

Government Spending

During the 20th century, political economy saw a worldwide trend toward increase in the size and activity of government. The duties of government came to include not merely tasks that private business and individuals were unable to perform, such as national defense, but activities that had heretofore been confined to the private sector, such as the provision and regulation of medical care.

Proponents of bigger government hailed this trend while devotees of limited government deplored it. In terms of our model of spending, the substitution of government for the private sector means a change in spending category and in the relative efficiency with which money is spent. Evaluating this change is one of the best ways of deciding whether more and bigger government is good or bad.

Most government spending is Category IV spending. Legislators appropriate large sums of money from the Treasury and spend it for the benefit of large groups of people or the nation at large. Sometimes the money being spent has a traceable relationship to money raised from the public; sometimes it does not. Sometimes the legislators actually contribute to the funds from which the spending is drawn; sometimes they don’t. (For years, Federal employees were exempt from Social Security and had their own retirement plan. Likewise, state employees hired before 1986 do not contribute to Medicare.) But an individual legislator’s percentage share of the spending and benefits is so minute as to be imperceptible; other incentives swamp the cost and value considerations cited above for legislators.

Category IV spending is the least efficient kind of spending in both senses of the word. It is also the kind of spending most conducive to fraud. Fraud is generally thought of as “deceit” or “trickery,” but its legal definition requires that the perpetrator lacked any intention of performing or providing the contracted-for good or service. Intentions are best gauged and fulfilled by their possessor; by definition, one cannot defraud oneself legally, however self-deceptive one’s actions may be psychologically. Thus, Category I spending is proof against fraud. Category II and III spending has at least the safeguard that you are vetting one end of the transaction, although this is not absolute proof against fraud. But Category IV spending is an open invitation to fraud, since nobody has a direct interest in efficient spending on either end of the transaction.

A Case Study in Government Overspending: Medicare

The Medicare program is a classic case of inefficient government spending in general and an invitation to fraud in particular. Medicare’s general inefficiency lies in its Category IV status. The recipients of the Medicare program are (as a first approximation) elderly Americans. But program expenditures are ultimately determined by government, which approves covered procedures and global budgets. Efficient spending requires patients to view doctor visits, tests and medical procedures as expenses, buying them only when their prospective value outweighs their cost. Doctors should aid patients in determining prospective benefits. Instead, the program grossly distorts the true economic costs of medical treatment by understating them. Doctors have no incentive to seek least-cost treatment regimes since they know that patients pay only a relatively small ($140) deductible and 20% of subsequent treatment costs. Patients have little incentive to minimize costs since they pay so little at the margin for additional treatment. This alone is a formula for overspending – which is just what has happened around the world, forcing most countries to ration medical treatment inefficiently by queue and government fiat rather than efficiently through the price system.

Total Medicare expenditures exceed $500 billion annually. Fraud detections of just under $50 billion are probably underestimates, but nobody knows the true extent of Medicare fraud. One of the most prevalent forms is billing fraud, in which providers bill the government for services not performed. In these cases, the government is spending taxpayers’ money for the ostensible benefit of patients but the actual benefit of providers. Since patients do not pay the bill, they have no incentive to detect or object to the fraudulent payments. Sometimes fraudsters will include patients in the scheme, in order to reduce the likelihood of detection. Since patients are not paying the bill, they do not lose from undetected fraud but do gain from kickbacks.

What about the fact that Medicare recipients are also (often still) taxpayers? Since no action taken by Medicare recipients can affect taxes already collected from taxpayers, recipients quite correctly view those taxes are sunk costs. They ignore them and abuse the system just as much as any non-taxpayer. And their behavior is economically rational.

The Limitations of Government

Why are you a more efficient spender of your money than government? The Friedmans accurately pinpointed one key reason: incentives. You have the strongest incentive to achieve both kinds of efficient spending, cost-minimization and value-maximization. But they almost completely overlooked another, equally important reason: information. In order to buy at least cost, You must be able to locate the names and prices of the relevant sellers. In order to maximize value, you must obtain relevant information about quality and potential substitute and complementary goods.

Economists have traditionally taken this ability for granted, which may be why the Friedmans mostly ignored the issue. Even the well-known economic treatments of the subject of information by Nobel laureates George Stigler and Gary Becker have begged key questions by assuming that buyers and sellers would automatically gather information up to the point where it was no longer economically sensible to continue. The missing link in these treatments is that they assume that consumers already know the nature and type of information that needs to be gathered. In other words, they are supposed to already know what they don’t know, and their only problem is how to (and to what extent) to find that out. Or, to borrow a form of expression currently popular, Stigler and Becker have assumed that the problem is one of “known unknowns.”

But the ghastly failures of regulation that led to the housing-market collapse, financial crisis and Great Recession show that the problem of “unknown unknowns” is at least as big. Regulators didn’t know various things – that sovereign debt and mortgage securities were now unsafe asset classes despite their history of safety, for example – and didn’t know that they didn’t know them. Their ignorance was disastrous. It rendered their good intentions useless.

The advantages of leaving most decisions to markets are that markets produce information to which governments have no ready access and markets leave more options open to decisionmakers. Free health-care markets allow doctors and patients to decide upon medical treatment, thereby generating vast quantities of information about how different individuals prefer and react to different regimes and medications. Most of this information is lost to government-dictated panels that formulate so-called “best practices” protocols under government health-care systems.

When regulators promulgate a rulemaking, they are betting all chips on their solution being the correct one. When they are wrong, as they were recently in housing and finance, the outcome can be catastrophic. Markets allow for differences of opinion among participants, thereby mitigating the results of mistakes. For example, banks who rigorously followed Basel banking guidelines and held ultra-safe assets like sovereign debt and mortgage securities stood a good chance of going bankrupt, while those who defied regulatory recommendations by diversifying their asset bases fared much better.

The Evolution of Unlimited Government Spending

The severe drawbacks of government spending are so important because the welfare-state model of unlimited government spending has gradually become dominant across the Western world. Starting with the Bismarck administration in Germany in the 1880s, spreading to Scandinavia and to post-World War II Great Britain, and then culminating with the triumph of big government in the U.S. in the 1960s, the trajectory of government spending has pointed skyward at the angle of a launched ballistic missile.

If government spending is so inefficient, why has it overpowered the Western fisc? For that matter, the current issue of The Economist notes that Asia is traveling the same path trod by the West. What Gresham’s Law of sovereign finance has achieved this perverse evolution?

Perhaps the answer can be found in the history of big government in the West. Economics developed as a science partly by exposing the shortcomings of government. These included the propensity to interfere with trade by taxing it or prohibiting it altogether, the futility of hamstringing markets with price ceilings and floors and the downside of printing money as a means of government finance. A conventional wisdom among economists relegated government action to a bare minimum of activities.

Unfortunately, reformers chafed at these restrictions on their ability to improve the lot of humanity. Their discontent coalesced around the idea that the bad effects of government action were a function of its form, not inherent to government itself. Price controls were developed by the Roman emperor Diocletian. Tariffs and quotas in international trade were the residue of the philosophy of mercantilism, followed by Spanish and French kings of the 16th and 17th centuries.

Surely dictatorship and monarchy were to blame for the backwardness of life under the ancien regime, not government per se. In contrast, prosperity and a large measure of peace had followed the advent of constitutional democracy in Europe and the U.S. If democracy could supplant authority in government, the good intentions and institutions of the democrats would overcome any inherent limitations of government and enable government to act more quickly, more surely and more comprehensively than private markets to undo the remaining evils of the world.

Alas, the 20th century taught us that professed good intentions are not nearly a prophylactic against the damage wrought by government unchained. Bismarck’s concessions to 19th-century socialism led to a German welfare state, which led to – Adolf Hitler, of all things. 20th-century liberals scoffed at F.A. Hayek’s warnings against economic planning as the precursor of totalitarianism, but the welfare state has inexorably reduced freedom and free markets as a glacier gradually engulfs all in its path.

The Collapse of the Government-Spending Machine

20th -century liberals in the Franklin Roosevelt administration envisioned a dynasty founded upon government spending. “Tax and tax, spend and spend, elect and elect” was their mantra. The formula has worked for nearly eighty years, not only in the U.S. but around the world.

Now the welfare state is foundering, largely on the issue of spending and its resulting debt. It is at least possible that if government spending were as efficient as private spending, we would tolerate the loss of freedom involved in exchange for the ostensible security provided by the welfare state. But government spending is so wildly inefficient and out of control that even if we were willing to sell our souls to Big Brother, none of us could afford the price tag. A tsunami of debt will drown the world monetary system and end the use of money for indirect exchange unless we make government our servant instead of our master.

Former British Prime Minister Margaret Thatcher once said that “the problem with socialism is that eventually you run out of other people’s money.” Although there are no theoretical limits on the ability of governments to create money, there are practical limits on our ability to absorb created money and government spending. Those limits are now in sight.

Most of the countries in the Eurozone have serious financial problems, either related to structural debt from overspending (Greece, Portugal, Belgium) or debt caused by bank bailouts (Spain, Italy, France, Great Britain, Ireland) or both. Only Germany and Switzerland are relatively problem-free, but they face the grim prospect of bailout out the rest. Banks in the U.S. are closely linked with European banks, particularly those in Great Britain. The need for spending reform is widely recognized, but the overspending has become so culturally entrenched that even a program of austerity, which is hardly thoroughgoing reform, raises the threat of riots and protests in the streets.

Only a few countries in the world have been prescient enough to recognize that the fool’s paradise is no longer inhabitable and must be depopulated via entitlement reform. Ironically, one of these is Sweden, which has passed its own version of Social Security privatization and has eschewed the Keynesian policies and monetary profligacy favored by American policymakers. Few would ever have predicted that Sweden and the U.S. would pass each other on the Road to Serfdom – going in opposite directions.