Excerpted from Seth Klarman's Baupost 2012 Letter to investors,
Absent an immediate crisis - and sometimes in the face of one - governments will often struggle to meet great challenges. Michael Boskin, former chairman of George H. W. Bush’s Council of Economic Advisors, recently described five tendencies of governments that should sound familiar. They include:
(1) Waiting until forced to act, often too late and with great harm;
(2) Systematically ignoring long-run costs to provide short-term benefits;
(3) Trying unsuccessfully to circumvent the laws of economics;
(4) Ignoring the laws of arithmetic, selectively counting some effects while excluding others; and
(5) Enacting programs or spending money in a crisis or boom where especially large unintended consequences become apparent only when the economy returns to normal.
This is a truly damning indictment of government arrogance, ineptitude, and overreach in the economy and beyond.
The short-term palliatives we are currently pursuing go against everything a long-term oriented society should aspire to achieve. Today’s policies encourage spending over saving, reward the profligate over the prudent, and support the failing at the expense of the successful. The antidote now being dispensed puts us squarely in uncharted territory in which the risks are outside the range of historical experience. There is no obvious exit and no path to normalcy.
Growing entitlements are popular with voters and with those whom they elect, for obvious reasons: because the bill never seems to come due. But come due it will. According to the law of economics named after the late economist and author Herbert Stein, if something cannot go on forever, it will stop. The result, which we are beginning to see already, is an acrimonious debate that divides rather than unites. Instead of efforts to expand the national pie through large investments in scientific and medical research and repair or replacement of our crumbling infrastructure, for example, we waste our breath bickering over the fairness of how we will share a flat-to-shrinking one.
Our spending is completely out of control, and, as of now, it seems as if the situation will have to become calamitous before we act. Let’s hope that it won’t then be too late.