Fixing The Incentives: How Fiat Funds National Corruption

Governments with the power to print money on a whim can avoid accountability and pursue corrupt agendas.

This is an opinion editorial by Jimmy Song, a Bitcoin developer, educator and entrepreneur and programmer with over 20 years of experience.

In the first two parts of this series, I wrote about the individual-level incentives and company-level incentives of fiat money. The individual-level incentives made personal lives have much higher time preferences through ubiquitous debt and lack of savings vehicles. The company-level incentives made communal life much more zombie-like and artificial through unnaturally-large companies that have replaced our families.

In this essay, I’m exploring the incentives at the nation-state level, where fiat money has perhaps its greatest effect. The power of fiat money gives governments the ability to become more authoritarian. Not only do we get a welfare/warfare state, but we also get a surveillance state, a police state and militaristic, corrupt tyrannies. The siren song of Marxism, of positivist law and an authoritarian vision are some of its rotten fruits. The unprecedented destructive power of governments in the last 100 years can be laid squarely at the feet of fiat money. Government authority and power have expanded more than the average American’s waistline and the consequences have been just as deadly.

With Great Power Comes Great Responsibility

The central control of money is an enormous prize, like the Infinity Gauntlet of Marvel fame, giving those in power the ability to steal the wealth of their nations at will. This isn’t obvious at first because the mechanisms of central banking don’t make this monetary power dynamic easy to understand. Central banking is thus very attractive to governments and pretty much all fiat money since the 20th century has been of this type.

The main beneficiary of this obscured ability to print is the government that can run deficits on its budget. This was not the de facto practice historically as taking on debt under sound money is very expensive. Free market interest rates usually hover around 5.6% or higher, depending on the economic circumstances and credit worthiness. Taking on debt under sound money generally means really having to tighten budgets or raising taxes later, neither of which are popular. There’s an opportunity cost to spending that’s inherent in sound money that more or less disappears under fiat money. The major budget battles in the past used to be about trade-offs of various budget items. Under fiat money, budget battles are about who will get to hand out more rent-seeking positions.

Running a deficit means that hard choices don’t have to be made. Instead of having to choose between high-interest debt, increased taxes or budget cuts, fiat money lets governments avoid all three with an additional option: implicit taxation through inflation in the form of low-interest, easily-renewed debt!

The ability to run a deficit not only throws all discipline out the window, but it lets the people in charge use that money for the thing that people in charge tend to care about: staying in power. Hence, policies that favor certain constituencies or even straight up bribes proliferate. The power of controlling money is great and, unlike Spiderman, governments don’t use this power with much responsibility as can be seen in how they run themselves.

Staying In Power

Governments, no matter what form they take, have as a major priority the goal of staying in power. This is true not only of dictatorships, but also of representative democracies. The differences between them are the means employed. A dictatorship may arrest, jail and kill political dissidents. A representative democracy may give new entitlement benefits to political allies. The goal in each case is to neutralize threats to continued rule and to strengthen the government’s supporters.

What fiat money does to this desire is give those in power many more options. Under sound money, budgets had to be balanced, meaning that for every program that spent money, there had to be some revenue generator, such as taxes, to compensate. Generally, taxes are unpopular and too many taxes will cause a populace to revolt, which risks losing power. Fiat money is thus a godsend to those in power as it avoids making taxes explicit.

With this power of money printing, those in power can benefit themselves in various ways, which we turn to now.

Entitlements

Governments can provide benefits to various constituents to get their support. This can include everything from healthcare to food to pensions. Indeed, since the advent of fiat money, these entitlements have become common all over the world. They are generally sold to the public as a form of compassion and they’re very popular due to the perception that they’re “free.” The hidden taxation of inflation is rarely even acknowledged, let alone blamed.

The problem with welfare is that it becomes a cost center that grows uncontrollably. In the past, welfare recipients could only get what the government could afford within a budget. It had to be restrained and traded off against lots of other budget items. With fiat money, however, the welfare benefits never really stop growing. Fiat money funds entitlements, which enter the economy and causes the prices of everything else to rise. Soon, the benefits have to compensate for the loss in purchasing power which adds even more fiat money into the economy which causes the prices to go higher and so on.

Social security, for example, started as a tiny program relatively in the U.S. budget. It’s currently 21% of the budget and has grown enormously as more and more generous benefits have been granted. Similar programs like Medicare continue to grow. Food stamps covered three million people in 1969 and covered 15 million by 1974 and some 42 million today. We’re well past the point where self-interested voting will guarantee escalation of money printing.

The problem is that there’s no political will to stop entitlement programs because they induce dependency. Dependent people are loyal and will keep the government in power.

Thus, the only ways in which these programs expire is either through hyperinflation or through externally-imposed budget constraints. The latter is imposed by quasi-international organizations like the IMF, BIS and the World Bank. And indeed, that’s the topic of the next essay, but in the event of hyperinflation, everything is thrown into chaos. This is an all too common economic result for many countries around the world, particularly those that don’t have great relationships with the U.S.

Police State

Another usage of fiat money for political power is in the enhancement of the police state. Staying in power requires a lot of vigilance and watching for would-be revolutionaries is part of every government’s agenda. Fiat money has several mechanisms for doing this.

First, as fiat money is increasingly digital, governments can restrict its movement for those that are in opposition. Taking away bank accounts is a relatively cheap way for governments to defund their opposition. Many human rights activists around the world have felt the choking hand of government constriction over their money.

Second, fiat money can fund direct surveillance. Governments have many programs for tracking individuals and from their points of view, surveillance is a small price to pay to prevent being overthrown. Surveillance is very difficult and costly, requiring a lot of technology and personnel, but since it’s such a critical part of staying in power, governments will pay for it, inflating their own currencies to do so.

Third, fiat money can fund more police and military. These are some of the most expensive budget items yet those in power will deficit spend to build these up. The reason is because they’re insurance against any sort of coup. The ability to deficit spend means those in power can make an unnaturally large police and military to impose their rule. It’s a terrible use of resources, especially in poorer places, but that’s the power that fiat money gives, the ability to spend the resources of an entire country in whatever way the leaders want.

The military can also be used for conquest outside the country’s borders and that’s what we turn to now.

War

Thus far, we’ve discussed the various ways in which governments can use fiat money to defend internal threats against their rule. The other major threat to staying in power are external threats, which take the form of other governments wanting to topple your country.

Defending against external threats means building up the military, especially through highly-destructive weapons like nuclear warheads. Thus, many countries use fiat money to build up their militaries.

While the military build up prevents smaller skirmishes, when war breaks out, there’s a quick degeneration into total war. Under fiat money, war can be escalated easily through money printing. This is because the normal backstop of financial bankruptcy no longer exists. Because fiat money removes normal financial considerations, wars generally bring entire countries’ economies into the war effort. Thus, wars are often waged until one side is completely destroyed.

We saw this in action in both world wars where both sides went to total war, putting all resources of an economy toward the war effort and destroying a significant portion of civilization.

Rent-Seeking Jobs

The final use of fiat money for staying in power is bribery. We usually think of bribery going the other way, where people in industry bribe officials in government for special favors. And indeed, that still happens, but what governments do is in many ways worse. They use fiat money to buy votes. In a sense, entitlements are a form of that, but more effective is bringing more people into government itself.

Especially in countries with chronic unemployment, giving favored constituencies jobs is a much more effective way of ensuring loyalty. Combined with a moral imperative to take on more responsibility, governments can grow very large just in personnel. For example, about one third of Lebanon’s active population is employed in civil service. Is it any wonder they are suffering from hyperinflation?

Most of these people are rewarded more for their loyalty than for any functions they perform for the government, so they can rightfully be described as rent seekers.

Enormous Government

In part two of this series, I showed how fiat money fuels the growth of large companies. The same dynamic supercharges the growth of the government, except instead of commercial banks that give the government large loans, it’s the central bank. The dynamic is all the more potent as government is a natural monopoly and there’s no pesky need to make a profit.

The government grows like cancer well beyond levels necessary to fulfill the functions that it’s assigned itself. The access to money for a government is even greater than for corporations and thus, governments grow by leaps and bounds through a few different mechanisms. Fiat money is the fertilizer on a fresh field getting invaded by the weeds of government.

The first and most obvious way governments grow is through taking on more responsibility. As we’ll see, there’s a moral imperative for governments to provide solutions to any and all problems. Hence, the responsibilities it assigns itself grows ever larger. A taken responsibility, like creating enough energy for the country, becomes its own regulatory complex. Anything perceived to be too risky for the market, or uneconomical, are natural places where the government steps in. Thus, we get stuff like national flood insurance and rural electrification. Even if the government does a good job, these programs likely lose a lot of money, because if they made money, private industry would be all over them. The more likely scenario is that the government not only loses lots of money, but also does a poor job.

A second way governments grow is through nationalization. Subsidizing large zombie companies is a normal part of a fiat economy, but at a certain point, their finances get so deep in the red that they can’t get loans from commercial banks. At this point when serious money is required, governments often step in to provide bailouts. A government bailout necessarily means more say by the government, eventually to the point where the company will now belong to the government. Nationalization is the natural end of fiat companies. Bailouts are not the only path to nationalization, however. If an industry is perceived to be unfair in some way or if there’s a sufficient war emergency, that industry may just be taken over by force.

A third way governments grow is through bureaucratic bloat. Especially in poorer countries where there isn’t much industry, creating jobs tends to be a responsibility that the government takes on. As there are often not enough responsibilities, these become make-work jobs, which are naturally rent seeking. This is the administrative equivalent of digging ditches and filling them back in. It is to this final method of growth that we now turn.

Governments, Like Companies But Worse

Government jobs are supposed to serve the country, by performing functions like adjudication, defense and infrastructure. These require some organization and, given that it’s the government paying these people, such jobs are sought after. The reason is that generally, government jobs are very hard to get fired from. As I mentioned in the last essay, organizations past Dunbar’s number have major disadvantages and governments, being even bigger than companies, have great disadvantages in this regard.

In particular, it’s very difficult for those in charge to know what the workers are doing and rent seeking in such organizations tends to proliferate. Further, there’s little incentive for managers to even care about employee performance as there is no direct feedback from the market. The goods and services provided by the government aren’t market driven and require election waves or regime changes for even a small amount of change. Hence, the only way that such rent seekers lose their jobs is through some form of political upheaval.

The job security inherent in government work makes them very attractive, even if they don’t pay as much as industry. As mentioned in the last essay, companies provide a lot of benefits besides salary and this is generally true of government as well. Health insurance, unemployment insurance, pensions, etc. are all available to government workers. Add job security, even for some of the worst performers, and we get a clamor for these jobs, especially in places where unemployment is high.

This, combined with a government’s desire to stay in power, generally means a gigantic bureaucratic bloat. Because fiat money obviates the need for any sort of fiscal discipline, jobs are handed out to politically-connected people. These might be political supporters, relatives or perhaps even former political opponents. Political problems are often easily solved by bribes, and these bribes can take the form of government jobs and, of course, bribes are funded by fiat money. The only limitation on the growth of government is hyperinflation, which is essentially the death of an economy. The cancer can only grow as long as the host is alive.

Not Price Sensitive

The cancer of government waste spreads to companies through the procurement of goods and services. Not all government functions are performed by the government directly. For example, they don’t generally produce their own computers or cell phones, so contracts to buy these are again extremely lucrative opportunities for corruption.

The reason for external procurement is obvious: Government-created goods and services tend to be much poorer quality than their private industry equivalents. Just go to your local motor vehicle bureaucrat to see how poor government services can be. Thus, governments will contract out for a lot of goods and services they don’t offer on their own. These contracts are extremely valuable and there are many rent-seeking companies that sell exclusively to government.

Many are defense contractors, but they can be everything from event planners, hardware vendors, food services and pretty much anything you can think of. The key here is that governments can deficit spend and aren’t particularly worried about price. Laws and regulations may be written to try to get the government to care about price, but in practice, the budgets tend to be massively bloated.

This was the case in one of the biggest IT disasters we’ve seen from the government, healthcare.gov. The website was one of the many parts of the legislation colloquially called “Obamacare.” To get people to sign up, The government spent over $1.7 billion to build this website.

If this sounds like a lot of money, it is, and we’ll get to just how bloated a bit later, but massive bloat is not unusual for government spending. The healthcare.gov website was contracted to a firm in September 2011. After launch, America found out that the website couldn’t handle even 50 concurrent users and that the site was completely unusable.

The Obama White House got into a panic and put people on the case to fix the problem. After finding out that the system was built extremely poorly and that they needed people from the outside to fix it, they hired some software engineers from Silicon Valley. They managed to get the website up and running, but it was a Herculean task, requiring months of startup-level hours from some of the most talented programmers in the country to fix. A normal website like that takes anywhere from $3 to $10 million and private industry builds them on timelines much shorter than the 24 months government contractors were given.

That’s how inefficient government is and how little they care about cost. The power of money printing has given them so much leeway that they spent 10-times the time and 100-times the budget of people who were actually competent. This was a high-profile failure, so it’s easy to dismiss it as a one-off, but even if other parts of government are five times more efficient than the healthcare fiasco, there are a great amount of resources that are at minimum being mismanaged and wasted by the government.

Think about how these resources would be used by the free market! Think about how much prosperity such resources could be used for. Instead, they’re being wasted on bureaucracy, rent seeking, cronyism, corruption and embezzlement.

Moral Obligations Of Fiat Money

The ability to print money also has another effect on government: It increases the purview of government to be anything and everything. This is because it has the power of the money printer and can claim to use that to solve any problem. Indeed, this is what politicians promise.

Morally, the logic is understandable. If you have the power to print money, that power should be used to relieve any and all suffering. Hence, there’s a moral obligation to go solve any perceived problems and injustices.

If someone is suffering, the government has an obligation now to step in. If someone is poor or disabled or sick or oppressed, the government has an obligation to fix it. There’s no real limit to the government anymore because the government operates in a Keynesian fantasy. Governments think there are no tradeoffs to creating new money. Instead of measuring the good of one program versus another, which is what you’re forced to do with a normal budget, there’s just more money that can be printed to solve the problem through deficit spending.

Thus, there are no personal problems anymore. All problems belong to the government. More people will eschew personal responsibility because the government has the power of money printing and that power gives them the power and responsibility to give the people a good life.

Of course, this is a lie as there are tradeoffs. The value from printed money comes from savers and all of these government programs come at a cost of things that would empower individuals instead.

A Trend Toward Standardization

Solving problems for people at a national scale tends toward one-size-fits-all solutions. The scale that companies have to operate at is large, but for a government, the scale is even larger. Combined with the monopoly and the long feedback loops from the market for government services, personalization of any kind gets thrown to the wayside.

Big companies also operate this way, which is why the modern world feels so impersonal. We’re being treated by companies and governments as interchangeable parts. The education system is a case in point.

For government and companies to run reasonably, each person has to be a cog in the wheel that can be replaced. An irreplaceable part doesn’t scale. Thus, corporate and government roles are very standardized and the education system facilitates this by churning out cog pieces. If you’re an accountant, you can fit into many different companies. An engineer, the same thing. Indeed, many of these roles are protected by government regulation.

Further, the process of being formed into these cog parts has implicitly given governments unprecedented authority. The government determines who can do what through licensing, from cutting hair to selling real estate. The government controls the supply of various professions and we get artificial restrictions on some of the most desirable jobs.

Because we have been made to be cogs in a system, there’s also a strong government tendency to standardize in other ways.

Tendency Toward Tyranny

Given all the money available, and the moral responsibility they’ve taken on, most government leaders start working toward their version of utopia. Once they’ve been given a moral imperative of fixing all problems, it’s a short step to directing all of this effort toward some sort of perceived ideal.

Here’s the problem: The ideal requires significant social engineering to make it work. And that social engineering quickly leads to totalitarianism. Nazi Germany and the USSR were two examples of countries that tried to usher in a utopia through totalitarianism. The massive human suffering that resulted was funded by fiat money.

Of course, not every government will end up killing millions, but governments will want to control the behaviors of their people to aid in the bringing about of their utopia. The usual strategy to socially engineer a society toward a particular vision is to convince people of the righteousness of these outcomes. Propaganda is an outgrowth of this desire to control and the means, of course, are fiat money. Propaganda is the one thing governments tend to be good at because that’s how those in power got into power in the first place.

In addition, fiat money gives governments the ability to control behavior without obviously totalitarian laws. By paying for the outcomes they want, they can socially engineer their nations toward the outcome the authorities want through economic incentives.

For example, healthcare can be a direct benefit, which would mean conscripting a lot of doctors and medical equipment and facilities. This tends to not work very well, as government management tends to run such systems badly. But by providing fiat money, the tyranny is more obscured.

Government dependency increases and we head toward a totalitarian state through the back door.

Bitcoin Fixes This

Bitcoin fixes these incentives because the government no longer has the incredible power of money printing. Deficit spending becomes more expensive and thus less used. The apparatus of government will become much smaller simply because they’ll be constrained by individuals sovereign over their own wealth. No longer will there be the option of stealth theft via inflation. The Infinity Gauntlet will be destroyed.

The apparatus of government, including entitlements, bureaucracy and the military industrial complex will be sharply curtailed. The unpopularity of explicit taxation will shrink the public sector and the rent-seeking jobs that come with it. Tyranny will be limited because governments won’t be able to induce dependence with endless money printing.

As such, everything will get less political as politics won’t be in everything. The moral imperative of government will no longer be to solve everyone’s problems because their limitations will be obvious. This will reduce the role of government, especially in the sphere of moral demands. Instead of some authoritarian ideal, we’ll get to live our own dreams and set our own goals.

Bitcoin is freedom from tyranny.

This is a guest post by Jimmy Song. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.