It is becoming odd how often Herb Stein’s Law appears in my mind. Herb was chairman of the Counsel of Economic Advisors under Richard Nixon and Gerald Ford. He is also the father of Ben Stein. His law says, “If something cannot continue forever, it will stop.”
That law should be the entire first chapter in a book about financial literacy. You cannot build long term security on short term effects.
I am baffled at how few people give credence to this simple statement of certainty. Many young people seem to believe that the government can and will look after their health, their retirement, their education, their daycare and at least some of their income. Even assuming the governments could look after anything, that collection includes things that cannot continue forever. When will they stop and how will they stop?
The fundamental fact that causes the surprising stop is that some people get something for nothing while other people get nothing for something. That trade only continues while the nothing for something crowd are willing to play along.
In the US, there are people who are becoming less inclined to play along. Tax refugees from California, New Jersey and New York are to be found in Texas, Florida and Tennessee. That makes the low rate states stronger and the high rate states weaker.
The Stein “stopping” may appear in some places before others. Chicago and Detroit may be the canaries of California, Illinois, Massachusetts and Hawaii.
As a group, people have two choices.
Choice 1) is clearly the more difficult. How do you explain reality to people who do not want to listen? Thomas Paine wrote,
“To argue with a person who has renounced the use of reason is like administering medicine to the dead.”
Choice 2) has difficulties, like how do you stand outside the burning economy. Or maybe your children will have to deal with it. Neither is comfortable.
The giveaways will become harder to sustain and soon. When interest rates inevitably rise, governments will be among the hardest hit. If rates become as they were 25 years ago, the cash cost to pay interest for the Canadian federal government will nearly triple. That money will come from somewhere. If from the people there is less to invest for retirement or in new productive capacity. If from borrowing then the problem grows.
The wealthy will not save the system because the wealthy have the means to move elsewhere or find other ways to avoid paying for the government’s current lack of courage and foresight.
In homage to Herb Stein’s law, something will happen. People cannot have something for nothing forever.
Choice 2 is the default.
With elections looming in North America, it might make sense to find some candidates who have an idea of minimizing the eventual fire. There are others who are providing gasoline cans.
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.