For our officials who are crafting the Cayman Islands’ next budget, and for our lawmakers who will vote on it, we consider a column we published today to be “required reading.”
In it, economist Richard W. Rahn (who is a member of the editorial board for our sister publication Cayman Financial Review), outlines the origins and unfolding of “The next financial crisis.”
Here’s the key paragraph: “The fundamental problem is most countries are experiencing little or no growth as a result of excessive government spending (particularly on transfer payments), and destructive regulations and tax policies. The unwillingness of the politicians (and their voters) to cut back on spending and regulation has led to an explosion of government debt, which is not sustainable at current levels of economic growth. This, in turn, is fueling a demand for more government spending (more free stuff) and thus more debt.”
The world has experienced the “tech bubble,” “housing bubble” and even the “tulip bubble” (referring to the 1630s craze, and rapid market collapse, for the flowers that had been recently introduced to Europe). Now, we have the “government bubble.”
Among countries with financially failing public sectors, there is a common denominator: Governments have been consistently overspending on socialist programs using capitalist dollars. When those dollars (and the population of capitalists) run out, debt begins to pile up.
We needn’t look far for prime examples. Consider our neighbors in South America: Argentina, Brazil and Venezuela – which have been experiencing tremendous economic struggles in spite of vast populations and abundant natural resources.
Argentina, at least, appears to have shifted back onto a better track, after electing right-of-center President Mauricio Macri, coming to an agreement with the country’s creditors, and mounting a succession of criminal cases against former President Cristina Kirchner.
On the other hand, Brazil’s star has been fading after years of being touted as the newest belle of the global economy. Now the nation of more than 200 million people is beset with woes, including the impeachment of President Dilma Rousseff and the downgrading of the country’s bonds to “junk” status. The upcoming Olympic Games in Rio de Janeiro, an event that was intended to be a “coming of age” celebration for Brazil as a first-world nation, has instead cast a harsh spotlight on the country’s third-world problems, such as sewage-tainted waters, Zika virus run amok and growing fears of violence – which led, of all people, Brazilian football star Rivaldo to warn tourists against visiting Rio for the Games.
As for Venezuela, well … Let’s just say the country, which has some of the most vast oil reserves on the planet, is nevertheless so penurious that it cannot afford to print any more of its own virtually worthless money. Lack of food, medicine, electricity, goods – basically everything – is causing immense suffering across the country.
While Venezuela is an extreme case, the underlying fundamentals are replicated across the globe: Greece, Puerto Rico, Detroit, Chicago …
For those who believe Cayman is somehow immune from the laws of economics, consider that our government is now spending $50 million annually for welfare, $107 million for healthcare and $252 million for central government salaries. Or ponder the billions in looming liabilities for public pensions and healthcare obligations, with little or no funds being set aside to offset those upcoming expenditures.
Think of our officials’ constant refrain that they do not have enough money to fund worthy initiatives – even modest ones such as Meals on Wheels, although government revenues verge on $1 billion per year. And think about the litany of “little luxuries” being packed into the election-year budget, such as health insurance for retired House Speakers, pay raises for the civil service or new pensions benefits being extended to former one-term legislators.
Remember that when rich countries, such as Argentina, Brazil or Venezuela, become poor, it is almost always the result of government bloat, blatant corruption or chronic overspending.
In Cayman, we must beware – and be wary – of those afflictions creeping into and contaminating our own public sector.