​Wrechard writes ably about the surprising weakness or our Invincible Institutions . . .

Bureaucracies which live for themselves

. . . a weakness which only manifests itself immediately before the fall.

More below the fold.

"Winston Churchill memorably predicted the end of the German East Asia Squadron when it slipped out of Tsing-tao harbor under Admiral Maximilian von Spee. "He was a cut flower in a vase, fair to see yet bound to die."  Winston knew that the Spee's s squadron however imposing and bravely led had no means of support.  Sooner or later it would come to grief, which it duly did."

The trick is to see the thing for what it is not what it could be. A fleet of ships is one thing, a supported, and re-suppliable fleet another. Do not confuse the two.

"The same calculation must apply to the giant bureaucracies that pretend to rule the world.  At first glance there is nothing seemingly more formidable than the interlocking shield wall of public institutions and public sector unions. One writer argued that JFK was "the real killer of Laquan McDonald" because he first authorized public employee unions and "police unions make it impossible to get rid of bad-apple cops".  Camelot had created a Frankenstein monster able to run roughshod over everything.

Yet it's a monster which just can't seem to do much.  For example the Washington Metro, the pride of the nation's capital, is collapsing.  Once "it was a rail system of the future. Then, reality set in."  Perhaps the most telling indicator of fundamental weakness is the public pension crisis.  A study by the Hoover Institution covering 97% of all state and local governments found that politicians have little or no ability to meet their pension promises.

Most state and local governments in the United States offer retirement benefits to their employees in the form of guaranteed pensions. To fund these promises, the governments contribute taxpayer money to public systems. Even under states’ own disclosures and optimistic assumptions about future investment returns, assets in the pension systems will be insufficient to pay for the pensions of current public employees and retirees. Taxpayer resources will eventually have to make up the difference. ... In aggregate, the 564 state and local systems in the United States covered in this study reported $1.191 trillion in unfunded pension liabilities (net pension liabilities) under GASB 67 in FY 2014. ...

What is in fact going on is that the governments are borrowing from workers and promising to repay that debt when they retire.

How do bureaucracies get so big they can't pay themselves?"

They see what they want to see, not what is. This is intentional blindness, because it suits their emotional needs. So, the public employees see that the union, and the public agency have agreed to pay a large increase in pension. These same people understand that money must be transferred from the public agency to the pension fund, but they simply believe that it is being done correctly, and they rely on the union to monitor this process. If it is not being done correctly, the union would squawk, right. Wrong.

The union and the agency are in collusion to increase the promised pension payouts, but both realize that the public would not stand for the large increase in taxes necessary to fund the payments. So, the agency doesn't make the payments, but instead relies upon a growing population of workers to increase the pension fund, or it creates fictitiously high estimates of returns, or it low balls the expected payouts by estimating that the pensioners will live shorter lifespans then they are actually living, or more likely combines these and other techniques to create a fictional pension fund.

It only comes to light that there is not enough money once there is crisis. This is why today we find some pension funds with less than 60% of necessary funds, and nearly all public pension funds seriously underfunded. After all $1.9 trillion is a massive amount of money. And nothing will stop it from coming due.

As Fernandez points out, we can see what happens if we just look at some of the current collapses underway right now, in Venezuela, or Brazil, or we could look back in history to the USSR. The outcomes are not pretty, and while our wealth will protect us some, it will not protect us completely. 

"Unsustainable bureaucratic behemoths turn out to be what Churchill described: "a cut flower in a vase, fair to see yet bound to die." They are not invincible, but quite the contrary have the distressing propensity to die.  The irony is that the gigantism voters often associate with safety is in itself a risk factor.  The bloat isn't protection, but a heart attack waiting to happen.  Economists have long known that being "too big to fail" is actually a source of moral hazard.

Global history records governments of all political persuasions using taxpayer funds to support distressed institutions. Perceptions of this implicit guarantee ... may also cause ‘moral hazard’. This means it may encourage systemically important institutions to take on more risk than is optimal, since they believe they receive any benefits from the risk taking while the government will bear the cost of failure.

Almost every saga of government expansion turns out to be a replay of the same old story.  The harder question to answer is why humanity keeps falling for it."

Fernandez attributes this same old story to the story of Nebuchadnezzar.

"“I have had a dream that troubles me and I want to know what it means,”  said Nebuchadnezzar and he sent far and wide for someone to explain things.  It comforted him greatly when Daniel told him the dream meant he had a place, albeit a transient one, in cosmic history.

Your Majesty looked, and there before you stood a large statue—an enormous, dazzling statue, awesome in appearance. The head of the statue was made of pure gold, its chest and arms of silver, its belly and thighs of bronze, its legs of iron, its feet partly of iron and partly of baked clay. While you were watching, a rock was cut out, but not by human hands. It struck the statue on its feet of iron and clay and smashed them. Then the iron, the clay, the bronze, the silver and the gold were all broken to pieces and became like chaff on a threshing floor in the summer. The wind swept them away without leaving a trace. But the rock that struck the statue became a huge mountain and filled the whole earth.
“This was the dream, and now we will interpret it to the king. Your Majesty, you are the king of kings. The God of heaven has given you dominion and power and might and glory; in your hands he has placed all mankind and the beasts of the field and the birds in the sky. Wherever they live, he has made you ruler over them all. You are that head of gold.

"I have a dream.  One day I'll be on top of the world."  Never mind that the statue had feet of clay so long as "you are that head of gold" even for a while. The great bureaucracies exist less for the public service than for the momentary exaltation of its great ministers.  It was always for them.  Us, not so much."

The bureaucrat acts for little more than vainglory. But there are more, in part, things which Fernandez has pointed out.

The workers/union members/pensioners want the rich payouts to be true. They very much like the idea of being well taken care of after an comparably early retirement. They like the idea of a rich pension income, full medical benefits, and other perks, perhaps even retirement bonus pay. And they believe that the public agency is eternal, and can always tax a little bit more to obtain the necessary funds, if there is a problem. 

The bureaucrats want a larger budget, and more employees, and they want these people happy. This way lies power for the bureaucrat, and perks, and ultimately larger pay, and benefits. They also need the taxpayers to view them favorably, and to remain allies, and not adversaries. They further need the politicians who oversee them to be happy, and to act magnanimously towards them, and the agency.

The union bosses want the union members happy, and money and retirement benefits, do this in spades. 

The politicians want to be re-elected, and nothing will do this like the ability to spend public money lavishly without causing taxes to increase. Further this system allows much graft and corruption, vote buying, bread buttering, contract awarding, whatever one calls it. This allows the politician to pad his re-election funds, and builds friendships for when he is gone. These union, pension funds, and other relationships he builds will serve him well after he leaves office. They commonly result in large remuneration, consulting fees, or other benefits. 

The taxpayers want the taxes low, and do not want to spend much time wrangling over public policy, taxes, agency spending, or other things which take them away from the things they really prefer: family, friends, and work/hobbies/interests.

You see, we all want the same thing. And with a little greasy manipulation from the accountants, and pension fund managers, we get exactly what we want, for a bit.

But then something happens. The money plateaus, the workers census keeps rising, the agency continues to grow, and the system slowly becomes top heavy, and bloated. But we know the system works, because it has worked for so many years. What could have happened to change that? 

The progressive era is ending. The progressives would like to believe that all that is needed is a dose of purgative, and a little exercise to cut a bit of the fat from the system, and all will be right as rain. But the system no longer analogizes to a fat man. it analogizes today to a turbine engine. Thirty years ago it was one of the blades exposed to huge temperature swings, and spun at over 100,000 RPM for thousands of hours which was failing. Today it is all of the blades which are failing, weakening, showing internal occlusions, cracks, and weakness. 

The outcome is as definable as the outcome for Admiral Maximilian von Spee's East Asia Squadron when it slipped out of Tsing-tao harbor. Like the East Asia Squadron, the only variable is time. 

It is no longer possible to repair this buggy with a wad of chewing gum, a piece of baling wire, and a hank of rope. Even duct tape will not cover the problems with the progressive system at end of life. 

The way forward is through the change. We will need to find a new functional socio-economic model with which to organize America, and, indeed, the world. We will need to finally let go of the socialism, the fascism, the progressivism, and hew more closely to the free markets with an ownership safety net, as opposed to the Leviathan State Safety Net. Our safety, and our future will need to be more carefully handled by ourselves. While today we view this as an increase in risk, this is because we fail to understand the risk of the Leviathan State Safety Net. That understanding is coming, and soon. It is coming in the form of the pension collapse, and ultimately the Leviathan State collapse. 

Once reformed, the states, and the people will press the federal into reform as well. Watch for the change coming from within the Blue states/Leviathan states for they will enter the crucible first, and will be changed first.