Gideon Rachman says Bankruptcy's the Cure!

Roy flags me to Gideon Rachman in the Financial Times on how bankruptcy could be good to us:

In Winnie-the-Pooh, there is a significant moment when the bear is asked whether he wants honey or condensed milk with his bread. He replies “both”. You can get away with this sort of thing if you are a much loved character in children’s literature. But it is more problematic when great nations start behaving in a childish fashion. When Americans are asked what they want – lower taxes, more lavish social spending or the world’s best-funded military machine – their collective answer tends to be “all of the above”.

The result is that the US is piling up debt. A budget deficit of about 12 per cent of gross domestic product is understandable as a short-term reaction to a huge financial crisis. What should worry Americans is that, with entitlement spending set to surge, there is no credible plan to bring the budget deficit under control over the medium term.

The US has formidable strengths that will allow its government to be profligate for far longer than other nations could get away with. But if the US keeps running huge deficits, sooner or later the country will start flirting with bankruptcy. Oddly, it might be best if the crisis came sooner rather than later. For a surprising number of countries, running out of money has been the prelude to national renewal.

The two biggest and most beneficial geopolitical stories of the past 30 years – the spread of democracy and of globalisation – were driven by a succession of states finding their coffers empty.

Etc., with talk about China, Mexico, etc. I'd love to know a lot more about exactly what he has in mind here. Seems to me that governments can go broke in a couple of different ways: one, by propping up insolvent state-sanctioned oligopolies. And two, by transferring wealth to poor people (although the two problems can overlap). So far as I can tell China (for example) carried and still carries a large chunk of essentially insolvent industry that survives through the protection of powerful political forces. Although I'm not an expert, I'll bet you could make a case that China's "liberalization" amounted to protecting the powerful on the backs of the poor.

In the US, we've had (and have) different kinds of debt problems. I'm one who believes we did ourselves a lot of good by blowing out a lot of private debt via bankruptcy and otherwise in the 80s and 90s. I believe we've got medium and long-range problems with public matters like Social Security and Medicare though I join the ranks of those who think the problems are vastly exaggerated and still solveable.

We've also got the somewhat distinctive problem of so much new public/private debt, i.e., via bank guarantees, company takeovers and such. We've certainly gone too far with that: I'm not sorry that Lehman failed, and I am sorry that Bear Stearns did not. And auto--hey, we have more vehicles on the road than we do licensed drivers, so why do we need Chrysler?

Rachman isn't specific here but the folks who talk like this aren't usually interested in hurting bank executives are shareholders; they are looking for ways to stiff a lot of poor people. As someone has said, they go to sleep at night nauseated that somebody with an income below the median might be getting a penny of government money.