You are on page 1of 3

D I S A S T E R C A P I T A L I S M , T H E D E F I C I T & T H E N A T I O N A L D E B T

You know that the best you can expect is to avoid the worst. 1

A wise person will not spend time installing a burglar alarm when the house is on fire. 2

ALARM

Deficit Hawks decry the federal deficit and the mounting federal debt. The sky is
falling! We must cut social programs to save the nation from going bankrupt! The
courageous even deign to cut the military budget. The President has convened a
deficit reduction task force meeting in secret to “get the deficit under control.”3

FIGHTING SHADOWS NOT ROOT CASUES

The national economy has four accounting buckets: (1) private sector (businesses
and private individuals), (2) government (federal, state, and local government), (3)
charitable organizations (not-for-profits, foundations, NGOs, academia), and (4) off-
balance sheet (externalities, contingent liabilities). For example, if the BP Gulf oil spill
ultimately costs the national economy ~$60-$80 billion all total over the life cycle of
the economic impacts of this spill, these economic costs must be allocated over
these four accounting buckets. There are no other places to put these real economic
costs. Thus, the tension, the political conversation, is always to which bucket do we
wish to allocate real economic costs.4

The primary reason for the skyrocketing federal deficit and the rapidly growing na-
tional debt is not that the federal government has profligate spending on social pro-
grams, but that it is the primary sector that recognizes the real economic costs as-
sociated with an aging population. For example, cutting Social Security and/or
Medicare payments may not save the economy any money. Such legislative actions
only transfer real economic costs off the federal government’s books to another sec-
tor. Things often cost what they cost irrespective of whose books these costs reside
on. The economics of various social and military government programs is a wholly
different issue of how should one pay for them or if these programs are accomplish-
ing their intended purposes.

Instead of worrying about the absolute size of deficit, more productive thinking
might be focused on questions such as, for example: (a) can the country continue to
allocate half of the federal government’s cash flow to military spending when the rest
of the world all together spends less than this amount annually; (b) can the national
economy continue to allocate 17% (soon to be 20%) of its gross domestic product
(GDP) to health care when the rest of the industrialized, capitalistic, democratic
countries of the world spend less than 10% of their GDP, yet achieve comparable or
better health outcomes; (3) is it moral or ethical to force a citizen who has contrib-
uted to the productivity of the national economy to the best of his/her abilities during
their working life to poverty when they reach old age?; etc.

Lyle Brecht DRAFT 1.3 -- Friday, July 16, 2010 CAPITAL MARKETS RESEARCH Page 1 of 3
D I S A S T E R C A P I T A L I S M , T H E D E F I C I T & T H E N A T I O N A L D E B T

DISASTER CAPITALISM AS A DRIVER OF PUBLIC DEFICIT & DEBT

Despite the hand wringing and distress over the federal deficit and mounting public
debt, the larger deficits and mounting off balance sheet debts are being generated
by the private sector in the United States via disaster capitalism. Disaster capitalism
is a particularly pernicious form of aberrant capitalism that is dis-economic (wealth
destroying) rather than wealth producing. This form of capitalism is often rationalized
by the myth of free markets unencumbered by government regulations. 5 But, unfor-
tunately, the end-result of disaster capitalism is market inefficiencies that radically
misprice the economic costs of inputs and outputs to the economy. When these
particular markets fail (which they always will), often the economic costs of market
failure are accounted for by the public sector. Essentially, the private risk from disas-
ter capitalism is socialized to the public sector.

Presently, for example, markets under disaster capitalism are not prone to efficiently
pricing systemic risk.6 Fundamental and structural inefficiencies in the market pric-
ing mechanism enable domestic (and global) markets to misprice inputs to and out-
puts of the economy by either deferring known economic costs to the future (exter-
nalities) or failing to account for known economic costs in the current period and
pushing these costs to public taxpayers (contingent liabilities).

If markets were efficient in pricing systemic risk and/or government regulations were
actually effective, by definition, there would be no threats from anthropogenic cli-
mate change due to excess carbon emissions to the earth’s atmosphere, the na-
tion’s groundwater resources would not be depleted, the global destruction of eco-
systems, and the extinction of species due to anthropogenic causes, etc. would not
be occurring.7 For all these consequents of not managing the systemic risks of mar-
ket transactions are dis-economic. That is, the economic costs for not managing
these risks are greater than the profits derived by pushing the economic costs of
these risks to the future or to public taxpayers. These systemic market risks are a
much, much larger economic problem than the federal deficit and growing public
debt. Not only are they larger, but these private sector unaccounted for real eco-
nomic market costs are growing much faster than the federal deficit and public debt.
The universe in its persistent becoming is richer than all our dreamings.8

ENDNOTES:
1 Italio Calvino, If on a Winter’s Night a Traveler (1979) in William Poundstone, Prisoner’s Di-
lemma (New York: Doubleday, 1992), 53.

2Nick Bostrom and Milan M. Cirkovic, “Introduction,” Nick Bostrom and Milan M. Cirkovic,
eds., Global Catastrophic Risks (Oxford: Oxford University Press, 2008), 28.

3 See AmericaReport: A Common Sense Report to the Citizens of the United States for addi-
tional detail. At http://www.scribd.com/doc/9717658/AmericaReport.

4 Private Sector versus Government: Which is Better: http://www.scribd.com/doc/12548397/.

Lyle Brecht DRAFT 1.3 -- Friday, July 16, 2010 Page 2 of 3


D I S A S T E R C A P I T A L I S M , T H E D E F I C I T & T H E N A T I O N A L D E B T

5 If one subscribes to the wisdom of markets, then the following corollary is that any govern-
ment regulation of markets is bad for as Fredrich Hayek intimated in a 1945 article, “The Use
of Knowledge in Society,” “Any attempt to regulate prices or business activity was doomed to
thwart the movement of knowledge needed to make the economy run smoothly” (Justin Fox,
The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New
York: HarperCollinsPublishers, 2009), 91-2). This mentality was most vigorously marketed by
Milton Friedman, a professor of economics at the University of Chicago in his Capitalism and
Freedom that expresses the idea that “whatever the government does is bad” (Fox 93-4). This
Chicago School understanding of economics devolved into what some refer to as Disaster
Capitalism: making a huge fortune specifically from natural and planned disasters exacer-
bated by poverty, social tensions, environmental degradation, ineffectual leadership, and
weak political institutions. Disaster capitalism’s raison d'être may be the promotion and gen-
eration of market inefficiencies – pricing signals that distort real prices for goods and services
and their real cost to the environment, public health, and social justice. The checkered history
and deleterious results of disaster capitalism is well documented in Naomi Klein’s, The Shock
Doctrine: The Rise of Disaster Capitalism (New York: Henry Holt and Company, 2007). The
most recent result of this economic theory is the 2007-09 financial crisis. See “Macroeco-
logics” for additional discussion at: http://www.scribd.com/doc/21804956/.

6 The most glaring recent instantiation of markets not pricing systemic risk and the impact on
the global economy appeared in costing of the price of insurance premiums for CDOs (collat-
eralized debt obligations derivatives based on the underlying asset values of mortgages on
real property) on Wall Street. Premiums for individual tranches of CDO’s were priced at a risk-
adjusted price that assumed no systemic risk. As the CDO market collapsed, U.S. taxpayers
were required to put up approximately $17,489 billion in reserves (potential future taxes to
make good on underpriced CDO insurance) at the height of the recent financial crisis.

7 Two structural problems of free markets under disaster capitalism exist today: (a) capital is
oftentimes not allocated efficiently to its most productive uses; and (b) profits from business
activities are used to guide investment decisions where, because of faulty accounting for the
economic costs of systemic risk (such as the discounting of ecosystem services value), little
or no actual profits may actually have been produced (even as they are reported in the firm’s
financial statements). According to the logic of the efficient market theory (a pillar of neoclas-
sical economics), if the markets actually priced goods and services at their true (intrinsic)
value, there would be no global warming today (at least from anthropogenic sources), etc.
What all these problems indicate is that markets are sometimes highly inefficient in arriving at
the true economic prices of inputs to and outputs from the economy.

8 Stuart Kaufman, Investigations (Oxford: Oxford University Press, 2000), 139.

Lyle Brecht DRAFT 1.3 -- Friday, July 16, 2010 Page 3 of 3