When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal

 

Democratic socialism—thereby fusing populist authorization with bureaucratic command—inverts civil society’s logic: spontaneous coordination yields to electoral control, property, and precedent to administrative discretion. The quest for legibility breeds discretion, opacity, colonizing associations, and politicizing provision. The polity grows more ceremonially majoritarian as its structure turns illiberal. Human relations become increasingly politicized. The space for autonomous and dissenting freedom steadily recedes—Vibhu Vikramaditya 

In this issue: 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal

I. Selective Framing: The "Smallest Deficit" Headline

II. Bigger Picture: Weak Revenues, Sluggish Spending, Cumulative Deficit Near Record Highs

III. Quietly Moving the Goalposts, Budget Gaps: Enacted vs. Revised

IV. Interventionist Mindset: The Root of the Fiscal Imbalance

V. The Economics of "Free Lunch" Politics: The Law of Scarcity Meets the Welfare State

VI. Debt Dynamics and the Savings–Investment Gap

VII Corruption as Symptom, Not Cause

VIII. Public Spending at Historic Highs and the DPWH Flood Control Scandal

IX. The DPWH Scandal: A Systemic Threat

X. A Policy Dilemma: The Impossible Choice 

When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal 

What the DPWH scandal reveals about the fragility of a spending‑driven political economic order

I. Selective Framing: The "Smallest Deficit" Headline 

Inquirer.net, August 29, 2025: A modest increase in government spending narrowed the Philippines’ budget deficit in July to its smallest level in nearly five years, keeping the shortfall within the Marcos administration’s target. The state continued to spend more than it collected after recording a fiscal deficit of P18.9 billion, albeit smaller by 34.42 percent compared with a year ago, latest data from the Bureau of the Treasury showed.

Figure 1

The July budget deficit headline—“smallest in nearly five years”—is a textbook case of selective framing. 

While technically accurate, it obscures deeper fiscal concerns by exploiting the optics of quarterly VAT reporting, which front-loads revenue at the start of each quarter. Since 2023, firms have filed VAT returns quarterly instead of monthly, so revenues at the start of each quarter appear inflated, producing artificial “surpluses” or unusually slim deficits. (as discussed last year, see reference) [Figure 1, upper image] 

This makes July look exceptional, but it is little more than a timing quirk—not a sign of genuine fiscal improvement.

II. Bigger Picture: Weak Revenues, Sluggish Spending, Cumulative Deficit Near Record Highs 

In reality, the cumulative January–July shortfall has ballooned to Php 784.4 billion, the second-largest on record. [Figure 1, lower chart] 

Revenues grew by only 3.26% while expenditures posted a meager 1.02% increase. The Bureau of the Treasury itself attributed the spending slowdown to the "timing of big-ticket disbursements of the Department of Public Works and Highways, Department of Social Welfare and Development, and Department of National Defense for their respective banner programs." 

Year-to-July, expenditures are up 8.2%, slower than 13.2% in 2024, but the bigger story lies in revenue weakness: collections grew just 4.8% this year compared with 14.75% in 2024. The 24.9% contraction in non-tax intake and the sharp deceleration in Bureau of Customs growth (1.5% vs. 5.8% in 2024) dragged overall revenues down. 

III. Quietly Moving the Goalposts, Budget Gaps: Enacted vs. Revised 

July’s Php 491.2 billion in expenditures also fell sharply below the Php 561 billion monthly average needed to meet the Php 6.326 trillion enacted budget. 

Figure 2

Compounding this, the Bureau of the Treasury reported that 2025 fiscal targets had been revised downward (by the DBCC) for both revenue and spending, now pegged at Php 6.08 trillion. [Figure 2, upper table] 

Authorities attributed the adjustment to "heightened global uncertainties," but the subtext is clear: the government is quietly recalibrating expectations to preserve its 5.5% deficit ceiling, even as structural weaknesses deepen. The headline may offer comfort, but the underlying trajectory points to fragility, not fiscal strength. 

The enacted budget sets the ceiling—what government aims to spend—while the revised budget marks the floor, revealing what it can realistically afford as conditions shift. 

Yet the jury is still out on whether the current administration will break its six-year trend of exceeding the enacted budget—or whether this implicit admission of slower growth will instead spur even more spending in the second half of the year. 

IV. Interventionist Mindset: The Root of the Fiscal Imbalance 

Of course, the fiscal imbalance is merely a symptom. 

As previously discussed, it is driven by behavioral factors—such as the heuristics of recency bias and overconfidence—combined with an overreliance on a technocratic bureaucracy fixated on flawed econometrics as the fountainhead of interventions. (see reference on our previous post dealing with the rising risks of a Fiscal Shock) 

Most importantly, it is fueled by a populace increasingly dependent on social democracy’s "free lunch" politics, anchored in a deepening interventionist mindset. 

As Mises Institute’s Joshua Mawhorter lucidly describes, "by living under a modern, highly interventionist modern nation-state, the default paradigm of political elites and the general public is that, whenever a problem arises, the government must do something, that not doing something would be irresponsible and disastrous, that it can only help, and that the worst possible option would be doing nothing. This might be called the interventionist mindset or interventionist paradigm." (bold added)

V. The Economics of "Free Lunch" Politics: The Law of Scarcity Meets the Welfare State 

This mindset lays the policy framework for trickle-down Keynesian spending programs financed by the BSP’s easy money. 

Public spending on an ever-widening scope of social services—including the proposed "universal healthcare" for all Filipinos—illustrates this. [Figure 2, lower left image] 

In simple terms, while such programs may appear ideal, the law of scarcity dictates that there must be sufficient savings to sustain a welfare state. 

If the rate of redistribution exceeds the growth of savings, funding must come from elsewhere—either by borrowing from future taxpayers or through the inflation tax, via financial repression and fiscal dominance enabled and facilitated by central bank accommodation. 

Yet a persistent reliance on borrowing or inflation is not sustainable. Both are subject to ‘reversion to the mean’ and will eventually face a reckoning through crisis.

VI. Debt Dynamics and the Savings–Investment Gap 

The thing is, while some authorities acknowledge the burden of public debt—"every Filipino now owes P142,000"—most attribute it to "corruption," a convenient strawman. [Figure 2, lower right picture]

Figure 3

Alongside rising expenditures, public debt surged to a record Php 17.56 trillion last July, sustaining its upward trajectory and accelerating in both scale and velocity! MoM changes depict this uptrend. [Figure 3, topmost and center graphs] 

All told, the Philippines suffers from a record savings–investment gap, which hit a new high in Q2 2025. [Figure 3, lowest chart] 

But "savings" in national accounts is a residual GDP-derived figure that is deeply flawed; it even includes government "savings" such as retained surpluses and depreciation, when in reality, the fiscal deficit reflects dissaving (as discussed during CMEPA last July; see reference). 

With public debt up Php 296.2 billion month-on-month, Php 1.873 trillion year-on-year, and Php 1.512 trillion year-to-date, the government is suggesting a forthcoming decline in public debt by the end of 2025. 

Technically, while a ‘slowdown’ may occur, this is a red herring—it omits the fact that soaring deficit spending inevitably translates into higher debt, higher inflation, or both.

VII Corruption as Symptom, Not Cause 

Social democrats fail to heed the lessons of EDSA I and EDSA II: corruption is a legacy of big government. 

What is often forgotten is that corruption is not the disease but a symptom of vote-buying politics—of a system built on free-lunch populism, where political spending buys loyalty, entrenches dependence, transfers wealth, consumes savings, and simultaneously erodes institutions through ever-deepening interventions. 

Per the great Frédéric Bastiat, 

"When plunder has become a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it." (Bastiat, 1848) 

Still, social democrats cling to the illusion that electing an "angel" leader can deliver an ideal command-and-control economy. They overlook that forced redistribution—or legalized plunder—breeds societal tensions and unintended consequences, triggering a vicious cycle of interventions and power concentration —exactly what Tocqueville warned against when he said absolute power corrupts absolutely. 

Again, Bastiat reminds us: 

"legal plunder may be exercised in an infinite multitude of ways. Hence come an infinite multitude of plans for organization; tariffs, protection, perquisites, gratuities, encouragements, progressive taxation, free public education, right to work, right to profit, right to wages, right to assistance, right to instruments of labor, gratuity of credit, etc., etc. And it is all these plans, taken as a whole, with what they have in common, legal plunder, that takes the name of socialism." (Bastiat, 1850) 

The bigger the government, the greater the corruption. 

VIII. Public Spending at Historic Highs and the DPWH Flood Control Scandal

Figure 4

Today, public spending as a share of GDP is at its highest level (!!) compared to pre-EDSA I and pre-EDSA II—and that’s counting only direct public expenditures, excluding construction and private sector participation in government projects such as PPPs and other ancillary ventures. [Figure 4, upper diagram] 

From this perspective, the ongoing flood control scandal is merely the tip of the iceberg, with contractors and select authorities in the “hot chair” serving as convenient fall guys for a much larger, systemic issue. 

IX. The DPWH Scandal: A Systemic Threat 

These X.com headlines provide a stark clue as to how public spending and GDP might be affected: [Figure 4, lower images]

• DPWH, DBM set 2-week deadline to review DPWH budget
• Palace says review of DPWH’s 2026 budget could expand to other agencies
• DPWH Secretary Vince Dizon suspends bidding for locally funded projects amid massive corruption scandal 

The unfolding DPWH scandal threatens more than reputational damage—it risks triggering a contractionary spiral that could expose the fragility of the Philippine top-down heavy economic development model. 

With Php 1.033 trillion allotted to DPWH alone (16.3% of the 2025 budget)—which was lowered to Php 900 billion (14.2% of total budget)—and Php 1.507 trillion for infrastructure overall (23.8% and estimated 5.2% of the GDP), any slowdown in disbursements could reverberate across sectors. 

Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity. 

Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness. 

Or if infrastructure spending is curtailed or delayed, growth slows and tax revenues fall—VAT, corporate, and income tax collections all weaken when economic activity contracts. 

This means the deficit doesn’t necessarily shrink despite spending restraint; the “fiscal hole” may, in fact, widen—imperiling fiscal stability and setting the stage for a potential fiscal shock. 

The irony is stark: efforts to contain corruption by tightening spending could deepen the very gap they aim to close.

To be clear, this is not a defense of corruption but rather a reminder of how dependent GDP growth has become on public spending, leaving it vulnerable to the vagaries of political oscillation—including the ongoing flood control corruption scandal.

X. A Policy Dilemma: The Impossible Choice

Figure 5

With debt servicing already absorbing a growing share of the budget (7-month interest payment accounted for 14.8% share of expenditure), and revenue buoyancy dependent on infra-led growth, the administration faces a dilemma—either sustain spending through a compromised political pipeline or risk a broader economic and fiscal unraveling. 

The lesson is, the real danger lies not in the scandal itself, but in the systemic exposure it threatens to reveal: 

• A growth model overly reliant on state-led spending
• A fiscal framework vulnerable to both political shocks and bureaucratic paralysis
• A debt trajectory that leaves little room for error when revenues falter 

In short, the interventionist mindset at the core of social democracy’s "free lunch" political economy entrenches structural fragility, as shown by the mounting fiscal imbalance. 

The DPWH scandal crystallizes a deeper tension—forcing the political economy to weigh popular demands for ‘good governance’ against the imperatives of a development model structurally reliant on public spending. 

As Roman historian Tacitus warned (The Annals of Imperial Rome): 

"The more corrupt the state, the more numerous the laws."

____

References 

Vibhu Vikramaditya How Democratic Socialism Inverts the Logic of Civil Society Mises.org, September 3, 2025 

Prudent Investor Newsletter, Philippine Government’s July Deficit "Narrowed" from Changes in VAT Reporting Schedule, Raised USD 2.5 Billion Plus $500 Million Climate Financing September 1, 2024 Substack 

Prudent Investor Newsletter, June 2025 Deficit: A Countdown to Fiscal Shock, August 3, 2025 Substack 

Joshua Mawhorter Interventionist Non-Interventionism Mises.org, September 5, 2025 

Prudent Investor Newsletter, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, July 27, 2025 Substack 

Frédéric Bastiat Economic sophisms, 2nd series (1848), ch. 1 Physiology of plunder ("Sophismes économiques", 2ème série (1848), chap. 1 "Physiologie de la spoliation"). Econolib 

Frédéric Bastiat, The Law (1850), Ludwig von Mises Institute 2007 Mises.org

 

Government Failure: Thailand’s Rice Subsidies

File this under another grand moment of government failure: Thailand’s rice subsidies

From the Wall Street Journal Real Times Economic Blog (bold mine)

Under the program, the government offered to buy rice from local farmers for up to 50% above the market rate in a bid to boost incomes and spending among a key constituency. The premise was that by hoarding rice Thailand would be able to force up rice prices globally, reaping a larger profit when the stocks were eventually sold.

But the program backfired as India and Vietnam ramped up their own rice exports, knocking Thailand from its spot as the world’s top producer and forcing prices down.

State warehouses were flooded with an estimated 10-15 million tons of rice that Ms. Yingluck’s administration was forced to sell in order to pay farmers after the plan’s financing became unsustainable, driving down prices further. Still, many farmers went unpaid for months, and a few committed suicide after finding themselves unable to pay off debts.

This seems like a wonderful depiction of central planning failure and of the political economic lesson called “There is no such as a free lunch”

The former populist governments of Thailand bought the farmers votes by providing rice subsidies. That’s because about 2/3 of Thai’s population have reportedly been rice farmers. The government eventually came to realize that their grand scheme of influencing world markets backfired which is classic example of the fatal conceit from central planning. 

And most importantly, the government eventually awakened to the reality that taxpayer resources has LIMITS!!!

So the parasitical dependency relationship which had been nurtured from Thai’s rice politics caused financial havoc to many farmers where many were left unpaid which prompted a few to commit suicide.

Thai’s rice politics seem to ring a bell with the Philippine setting whose very costly counterpart carries a slogan “rice self-sufficiency” program. Like in Thailand, spending by the government continues to bulge, part of which has been financed by ballooning debt.

The article’s intent has been to report that the junta government has “officially confirmed” the end of the controversial subsidy program under its regime. This should be a welcome development. But the military government said that the decision for its continuance “could be left to the new interim government”. This means for now Thai's rice subsidy has conditionally been placed in the backburner subject to future political exigencies. Politics has always been about smoke and mirrors.

Robert Ringer: The Curse of the Lottery

Free lunch has always been a seduction. Yet people hardly realize that there are always consequences to every action. This includes free lunch. Take for instance, in winning the lottery, the public sees only the 'winning' side, while ignoring the costs from such events.

The prolific self development author Robert Ringer explains

Here we go again, another centimillionaire via the Mega Millions lottery — $173.8 million after taxes.  The winner was fifty-six-year-old Ira Curry, who bought her ticket at an Atlanta newsstand.  A second winner, who bought his/her ticket at a gift shop in San Jose, California, had not yet come forward as of the time this article was being written.

Let’s hope that Ms. Curry doesn’t follow in the footsteps of the vast majority of past mega-lottery winners, whose lives became totally unraveled as a result of their newfound wealth.  In this regard, perhaps West Virginian Jack Whittaker is the poster man for past lottery winners.

Back in 2002, Whittaker was the winner of $315 million in the Powerball multi-state lottery.  Since he opted to take a one-time payout, Whittaker actually received “only” a little over $113 million after taxes.

The first reality of sudden wealth that Whittaker was confronted with was an endless parade of people with requests for money.  Some folks didn’t even bother to ask for a handout in person.  They just sent letters — fifty thousand of them! — telling him they needed some of his green stuff as soon as possible.

Whittaker forked over about $50 million before he came to his senses.  But when he backed away from his role as year-round Santa Claus, the mooches became angry.  A number of them even threatened him.

When their threats failed, many of the good folks in West Virginia started suing Deep Pockets Whittaker for a variety of alleged torts.  In fact, he’s counted about four hundred legal claims against him since he won the lottery.

Confused and intensely unhappy, Whittaker began carousing, drinking, and propositioning young gals in strip clubs.  His wife of forty-four years threw him out and, after giving away millions, he found himself with no friends.

But there was one glowing light in his life — his beloved granddaughter, seventeen-year-old Brandi.  Whittaker gave her four new cars and an allowance of $2,000 a week.  It was a real-life Beverly Hillbillies saga, only played out in West Virginia instead of California.

As one might have predicated, having that kind of cash in her pocket led Whittaker’s granddaughter to drugs.  Soon after that, her boyfriend, Jesse Tribble, died of a drug overdose in Whittaker’s home in September 2003.  Then, a little over a year later, Brandi, too, was found dead of an overdose.

Since then, things have only gotten worse for Whittaker.  Stating the obvious in a tearful 20/20interview, he said, “Money is not what makes people happy.”  Of course, every half-sober, mature adult already knows that.  But it’s important to understand that money also doesn’t automatically saddle a wealthy person with unhappiness.

As popular as the aphorism may be, money is not “the root of all evil.”  And, in fact, that’s not what the source of those words — the New Testament (Timothy, 6:10) — actually says.  Rather, it states, “For the love of money is the root of all evil.”  (My emphasis.)

Read the rest here.

This has not just been an isolated case, here is a list of 19 lottery winners who blew their winnings; some of them endured wrecked lives. 

This just shows how free lunches distort on people’s incentives by magnifying on the winner’s short term priorities or the quest for short term or instant gratification. Such collapse in self-discipline results to money taking over their lives. As a result, such windfalls in many occasions have led to adverse outcomes.

And to think of it, in many countries governments endorse or even operate lotteries

Election Promises are Mostly About Spending Other People’s Money

To all the voters out there. Be reminded that there is nothing called as a “free lunch”. Every scarce resources expended or consumed will have to be worked and paid for. What always seems free, someone will have to shoulder the cost.

Elections have mostly been predicated on promises, particularly noble sounding promises backed by the spending of other people’s money.

It’s important for the public to know and understand of the behavioral difference of how money is spent.

The distinguished free market economist Milton Friedman explains in the following video

Yet the easiest thing to do is to spend other’s peoples money. That's the expertise of political agents. But there will always be a price paid for this.

The following quote from the legendary investor Jim Rogers on the Fed’s policies embodies such dynamic:

If You Give Me A Trillion Dollars I'll Show You A Good Time

Online Scammers: Sophistication in Stupidity

Online fraud like the Nigerian Email Scam has been a growing billion industry, where victims has reportedly lost a hefty $9.3 billion in 2009 which has been up from $6.3 billion the year before.

Yet scammers ‘specialize’ on their predation, as their ‘marketing’ activities focus on duping on the most vulnerable of the society.

From the Wall Street Journal, (bold emphasis mine)

So why do the scammers persist in blanketing the world with outlandish propositions, announcing that they are from the very country whose name has become synonymous with online fraud?

Cormac Herley, a computer scientist at Microsoft Research who specializes in security issues, provides a convincing answer in a paper presented at a conference in Berlin and recently published on his website. In it, he analyzes the con mathematically, using an approach called signal detection theory. His crucial insight is to look at the situation not from the victim's point of view but from that of the scammers. Their challenge is to hook only people who will get sucked in deeply enough to send a significant amount of money—the "true positives." They must minimize the effort they devote to "false positives" (targets who might seem like dupes but are suspicious and/or never pay up).

It costs the scammers virtually nothing to spam the world, but it costs them a lot (especially in terms of time) to conduct all the follow-ups necessary to reel a sucker all the way in. The people behind "Captain Mbote" spent six months pursuing their quarry before he started wiring money to them.

A proposal offering a more realistic scenario might generate more replies, but most of them wouldn't pan out. The effort of sorting through them to find the real suckers would undermine the scheme's profitability. Instead, by screaming "This is another absurd instance of the familiar Nigerian scam," the fraudsters are filtering out what to them is spam—responses from suspicious people they don't want to deal with—and "letting through" only those most likely to play along. The fewer potential victims in the world, the more precisely the scammers must target them, and thus the more absurd and easy-to-spot the attacks should be.

The Nigerian scammers aren't alone in using this approach. Phishing attacks, like the urgent emails from the "IT Support Team" requesting our passwords to avert some Internet calamity, are so hackneyed that they likely ensnare only the extremely naive or credulous.

Mr. Herley's analysis of the Nigerian scam suggests a counterintuitive way to fight back. Most efforts to reduce Internet fraud focus on reducing the number of people who reply to scammers—by educating users or by filtering out the scam emails. But some attacks inevitably slip through, and some Internet neophytes inevitably fall prey.

A more effective solution, Mr. Herley suggests, would require considering the goal of the scammers. Increasing the number of responses to their emails, he shows, can reduce profits, as long as those responses come from people who never send money. Such "scam baiters" already exist (the community website "419 Eater," named after the Nigerian law that governs fraud, offers tips and support). The more scam baiters, the lower the average return to the scammers on each attack and the less incentive they have to continue the scam.

Perhaps clever artificial intelligence researchers could create automated scam-baiter bots that would simulate gullible victims, drawing out the interaction as long as possible. The most convincing victim-bot would possess sophisticated knowledge of how the scammers think and behave—precisely the knowledge that tends to elude us when we look at the world only from our own perspective. Similarly, the profitability of phishing scams could be reduced by sending bogus account numbers and other data back to the scammers.

As Mr. Herley's paper shows, what seems stupid can actually be quite sophisticated. It's only by imagining the situation with the roles reversed that we can see what we've been missing.

The growing size of the illicit industry accounts for a sad state of societal affairs which means there have been that big a number of precision targets or "suckers" in the world.

Yet “something out of nothing” has been the basic trap laid out by scammers for unsuspecting victims.

Ironically, “something out of nothing” is the same principle that undergirds politics—only that they come in the jargon of “free lunch” or the “Santa Claus fund”.

The difference is that politics has been rationalized as having to provide the services of “public goods” whereas online scams have been outright frauds.

My guess is that these two may have important causal connections; personal responsibilities may have likely been relinquished for the dependence on the welfare state, making many people vulnerable and highly sensitive to predation.

Nevertheless, knowing what you are getting into, understanding that there is no such thing as a free lunch, critical thinking, conducting research to self-educate, and importantly, self discipline will always serve as the best insurance against fraud of any kind—online scammers, stock market (e.g. boiler rooms), Ponzi schemes and etc., and most importantly, against political tomfoolery.

Quote of the Day: On Banking Union

But a banking union just makes the problem worse. Not today, maybe. But certainly tomorrow. What makes government action attractive is the opportunity for the body politic to pool its money to achieve things that individuals cannot achieve on their own. This idea ignores the possibility of voluntary collective action. But more importantly, the romance of this idea ignores the reality that inevitably, politicians are spending other people’s money. One of the simplest and deepest ideas of Milton Friedman is that people don’t spend other people’s money very carefully, especially when they are spending it on other people.

That’s from Professor Russ Roberts at the Café Hayek on proposals for a banking union to solve the EU debt crisis.

Whether it is banking union or fiscal union they are all the same, they ALL depend on the free lunch (Santa Claus) principle or of spending other people’s money.

And this is what makes the touted political solutions unfeasible and unsustainable. The easiest thing to do in this world is to spend other people's money.

The Unraveling of Europe’s Wonderland

Dr. Ed Yardeni at his blog, has a superb and eloquent piece on the problems besetting the Eurozone which he calls as Europe’s wonderland (bold emphasis mine)

The Europeans have had the best governments money can buy. Their elected leaders have provided them with all sorts of wonderful social welfare benefits. Many Europeans are employed by their governments to provide those benefits to their needy fellow citizens. Those who cannot find a job, or are too depressed to look for one, are provided with extremely generous unemployment benefits. Retirement benefits are great, and early retirement is the norm. Life has been very good in Europe.

Of course, that all costs lots of money. That’s why income tax rates are so high in Europe. On top of those rates, Europeans pay significant value-added taxes on the goods and services they buy. Yet there has been an ever-widening gap between government spending and revenues. That’s partly because Europeans have responded to their exorbitant tax rates with widespread tax avoidance.

The spending of European governments has ranged between 40% and 60% of GDP for many years. The revenues collected by these governments have ranged between 30% and 50% of GDP. The resulting deficits have led to rapidly rising ratios of government debt to GDP.

Attempts to bring back some fiscal sanity, led by Germany’s Chancellor Angela Merkel, are now widely caricatured as fiscal “austerity.” In my opinion, the only way to fix Europe is to slash government spending, reduce tax rates, enforce tax collection, and deregulate labor markets. Instead, enraged European voters are rising up against austerity and voting for the status quo. They haven’t indicated who they expect will pay the bills. However, they must be counting on either the Germans to pick up the tab or the ECB to implement more rounds of the LTRO.

European politicians who signed on to the “fiscal pact” promoted by Germany late last year are losing their jobs. Those favoring a “growth pact” are winning support, though they have no specific plan yet and certainly no way to finance it once it is specified. Also gaining support are various left- and right-wing fringe groups that tend to promote anarchy as the most effective way of overthrowing the established order and replacing it with their disorder.

Europe is at risk of devolving from an economic and monetary union into a disunion of failed states. The Greeks are unable to form a coalition government after the two major parties lost significant support to fringe parties over the weekend. They may need to have another round of elections. The remote chance of Radical Left leader Alexis Tsipras forming a coalition faded on Tuesday when New Democracy leader Antonis Samaras promptly rejected his demand to scrap Greece’s bailout plan, warning such a move would drive Greece out of the euro: "Mr. Tsipras asked me to put my signature to the destruction of Greece. I will not do this. The country cannot afford to play with fire."

(According to Greek mythology, Prometheus stole fire from Zeus and gave it to mortals. Zeus then punished him for his crime by having him bound to a rock while a great big eagle ate his liver every day only to have it grow back to be eaten again the next day. During the Greek War of Independence, Prometheus became a figure of hope and inspiration for Greek revolutionaries.)

The above is simply commonsense economics which shows that we can NOT spend ourselves to prosperity or that there is NO such thing as a free lunch.

This implies that reversion to the mean would be the natural order from previous overspending that produced high levels of debt. And the logical and commonsensical solution to such predicament would either be to raise revenues by making the economy more competitive or to reduce government spending, or more optimally, having to apply both approaches. The ECB can only kick the can and even worsen the scale of the imbalances.

Unfortunately many people live in dreams. Politicians and their academic and institutional backers pander to such utopianism by imposing the same policies that got them there. They do this by whipping up public’s sentiment by peddling half truths to the gullible and uninformed. A good example is media’s baloney over so-called “austerity” which in reality has been a gross perversion of semantics. Mr. Yardeni’s chart above reinforces my earlier assertions.

Yet Sweden’s anti-Keynesianism policies should serve as a wonderful counterexample where commonsense economics--economic freedom, genuine austerity and tax cuts--have been driving real growth.

Politicians and (parasitical) voters would like to make permanent a life of abundance, by living off someone else’s labors. Unfortunately the reality says that we are bounded by the laws of scarcity, and people’s efforts are constrained by such limits.

Thus when the proverbial rubber meets the road, delusions over Europe’s desired perpetual state of wonderland has been in the process of being unmasked.

Reality, says Libertarian author Robert Ringer, isn't the way you wish things to be, nor the way they appear to be, but the way they actually are.

Iranian Terror Plot: US Government’s Imaginary Hobgoblins

From Judge Andrew P. Napolitano (bold emphasis mine)

Since the tragedy of 9/11, numerous crazies and low-level copy-cats have engaged in criminal behavior which they hoped would result in the deaths of innocent Americans and somehow advance the cause of jihad. If you ask the leadership of the FBI, most of whose field agents are tireless, dedicated, Constitution-supporting professionals, it will tell you that it has foiled about seventeen plots to kill Americans during the past ten years. What it will not tell you is that there have been twenty foiled plots; and of them, three were interrupted by members of the public. The seventeen that were interrupted by the feds were created by them.

We all remember the three that were foiled by diligent Americans: The shoe bomber, the underwear bomber, and the Times Square bomber. In all of these cases, the crimes charged were those of attempting to kill and conspiring with others to do so. In all three of those cases, alert Americans on transcontinental flights on or the streets of New York told authorities of bizarre behavior, or actually subdued the threats themselves. There was no foiling by the FBI. The plotters were – thankfully – bumbling fools who had poorly planned their criminal behavior, and who ended up harming no one. All three are serving life terms.

But the more curious cases are the remaining seventeen for which the federal government has taken credit. They all have a common and reprehensible thread. They were planned, plotted, controlled, and carried out by the federal government itself. In all of these seventeen cases – from the Ft. Dix Six to the Lackawanna Seven to the Portland Parade Bomber – the feds found young men of Muslim backgrounds; loners who were bitter at America. They befriended them, cajoled them, and persuaded them that they could change the world by killing Americans. In all these cases, agents worked undercover and portrayed themselves to the targets as Arabs of like un-American mind. In some cases, the federal agents used third parties to act as middlemen. The third parties are typically persons who have been convicted of crimes and who, in return for leniency at their sentencings, were willing to work with the same feds who prosecuted them in order to help entrap whomever else those feds are pursuing.

Thus, in all seventeen of these cases, because of the command and control of federal agents, no one was ever in danger, no one was harmed, no bomb went off, and no property was damaged. But in all those cases, the losers whom the feds targeted each believed that they were interacting with real plotters who would really bring them cash and bombs. As we know, sometimes the cash arrived, but the bombs never did. The defendants were essentially charged and convicted for playing a game with federal agents.

The most recent of those government-generated plots was revealed yesterday. It has a new twist as it allegedly involves agents of the intelligence apparatus of the government of Iran. It, too, was destined to go nowhere, as the feds monitored and taped every move made by the target as he interacted with federal agents whom he stupidly believed to be drug dealers and co-conspirators. Today, the feds themselves revealed that high officials of Iran's government knew nothing of this. Of course, the neocons have demanded bombs on Tehran, no matter what the government there knew. And this plot came to light the day before the Attorney General himself was subpoenaed by Congress in the Fast and Furious case.

Read the rest here

Creating something from nothing isn’t just about the money printing; essentially this represents the fundamental precept guiding today’s modern political institutions. It’s the politics of free lunch.

So in order to justify the existence, the continued funding and the expansion of the warfare-anti terror state, credits on political ‘achievement’ targets has to be demonstrated. Hence if there have been no actual terror threats, then, as shown above, just engineer one.

With the help of mainstream media and the sundry apologists for the establishment, our civil liberties would then be diminished in the name of the security.

The great libertarian H. L. Mencken was darned right,

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

Cartoon of the Day: Free Lunch Politics

Here’s a nice parody of the political rhetoric of free lunches. [Hat tip Cato’s Dan Mitchell.]

This applies even to Philippine politics.

Just replace President Obama with local politicians who dangle free stuffs for votes and we get the same message.

Presidential Inaugural, Traditionalism And Spending Other People's Money

People are enthralled with ritualism.

This would be evident today in the inaugural of President-elect Benigno “Noynoy” Aquino III and Vice President-elect Jejomar Binay.

And the pomp and pageantry attendant to this celebration comes with a cost; we learned that more than 10 million pesos (US $215,000) had been earmarked for this grand event.

My wife tells me to let this be (which I guess reflects the mainstream view), since this has been a tradition.

To heck with tradition! Money consumed from public spending extravagance is always lost productivity.

And the same reason holds why Philippine poverty rates has also been a tradition, the Australian government website notes that, ``In 2006, almost 27.6 million people lived below the Philippines' poverty threshold. This represents 26.9 per cent of Philippine families and 32.9 per cent of the population. According to international data, 44 per cent of the population subsisted on US$2 or less a day.”

Since money is a scarce resource, public spending, which is always political, represents the priorities of political leaders. Therefore, traditionalism means “the heck with poverty, long live grandiosity!” Poverty, thus, is reduced to political convenience. They matter only during elections and when justifying policies to the public to expand government's role in society.

As the illustrious Milton Friedman precisely said, ``If I spend somebody else’s money on myself, then I’m sure going to have a good lunch!"

4 ways to spend money, table from Freedom Channel Blog

Thus, free lunch it is, at our expense.

How true, yet how unfortunate.

Unfortunate because, as Ludwig von Mises wrote in Omnipotent Government, "people lack the mental ability to absorb the principles of sound economics. Most men are too dull to follow complicated chains of reasoning".

In other words, the public's lack of understanding makes us all so easily manipulated by political leaders.

Mainstream’s Three “Wise” Monkey Solution To Social Problems

Say what you want
Say what you will
'Cos I find you think what makes it easier
And lies spread on lies
We don't care
Belief is our relief
We don't care

-Roland Orzabal, Tears For Fears, Ideas As Opiates

For the mainstream, our social problems can be simplified into three “wise monkey” solutions:

First, speak no evil-throw money at every problem.

Everyone desires a free lunch. Almost everybody believes that they deserve a special place in this world. Since society’s interests are divergent, such sense of entitlement should come at the expense of someone else. It’s usually dignified and justified with the word “right”. One man’s effort is another man’s privilege.

For them, scarcity of resources can only solved by forcible redistribution. It doesn’t really matter if there are limitations to the scale of taxation. It also doesn’t matter if redistribution reduces the incentives to produce and trade. It doesn’t matter if “picking winners” takes away resources meant for productive activities which have been meant to enhance livelihood. The only thing significant is to be at the receiving end. And it’s hardly ever been asked “when is enough, enough”?

Heck, it would even be politically incorrect to argue for prudence. ‘Moral’ justifications demand for immediate gratification. It’s almost always about NOW. Forget the future.

That’s why the intellectual classes long came up with varied theories in support of these political demands.

Importantly that’s why the political classes are enamoured with these concepts. Redistribution enhances only their power, esteem and control over the others. And that’s why “inflation” has long been a part of human nature, since the introduction of government.

For as long as the system is tolerant of such nebulous tradeoff, trouble can be kept at bay, ergo speak no evil.

The other way to see it is that while everyone wants to rule the world, in reality this isn’t feasible. It’s a mass delusion. The universal law of scarcity always prevails. By force of nature, artificially induced imbalances are resolved eventually.

Second, see no evil-elect or put in place a virtuous leader.

The popular redress to most social problems has been premised mostly on hope, cosmetically embellished by “specific” ennobling goals.

In times of frustrations, the next alternative has been to look for a saviour.

Yet hope is mostly anchored on symbolism. And these are what elections are mostly all about. Even if one’s vote doesn’t truly count, everybody believes they do. Elections are reduced to the polemic of self-import.

Hardly has the directions of policies been the context of any meaningful discussion. People’s arguments will always be simplified to what seems “moral” in the popular sense. Yet, a vote on a person to office is a carte blanche vote on the ensuing policies. But it’s hardly about stakes involved and the prospective costs, but mostly about emotions and the feeling of being in the winning camp.

And since the world has been condensed into strictly a “moral” sphere, political leaders are most frequently deemed to have been transformed into demigods.

Once in power, people mistakenly believe that these entities have transcended the laws of scarcity. People have assumed that they possess the superlative knowledge that is needed to effect the exigent balance on a complex and continuously evolving society. These leaders are presumed to know of our needs, our values, our priorities and our preferences, which lay as basis of our actions in response to ever changing conditions.

Not of only of knowledge, but people also expect leaders and officials to dispense justice and equity according to our sense of definition. Many see these leaders as reflecting on their values. And that’s why many fall for the dichotomous trappings of the well meaning “motivations”. Yet, motivations barely distinguish the role of “means” and “ends”.

Essentially genuflecting on hope to see one’s moral desires as represented by politics can be construed as refusing to see evil for what it is.

And it’s only when the rubber meets the road, from which people come to realize that their expectations have misaligned with reality-and usually through deepening frustrations or in the aftermath of some horrifying outcome.

Hardly has it been comprehended that politics and bureaucratic activities are merely HUMAN activities.

That leaders and officials are subject to the very same foibles as anyone else. That these people see things and act according to the incentives brought about by their interpretation of events, their existing limited and ‘biased’ knowledge and are swayed by influences brought about by cognitive biases, networks, familiarity, assessment of prevailing conditions, information relayed by the underlings, varying degree of stakes of involved and et. al.

Importantly like everyone else, their actions skewed based on personal values. So when a political or bureaucratic leader forces upon their sense of moral vision to a constituency and which has not well received, the result in some cases has been political upheavals.

Yet in spite of the repeated errors, people never learn from George Santayana’s admonition that those who ignore the past are condemned to repeat it.

The third intuitive recourse to any social problems is to hear no evil by enacting new rules/laws.

Like any “throw the money” and “virtuous leader” syndromes, rules are little seen for its costs but nevertheless oftenly envisaged as preferred nostrums to existing problems as identified from the biased viewpoint of the observer/s.

Causal factors are hardly considered in the appraisal of the existing problems. What seems more important is to automatically blame market forces and unduly impose proscriptions. Never mind if the past ills have been caused by the same underlying dynamic-previous interventionism.

The act of simply “doing something” is meant to be perceptibly seen by the voting public for political purposes (extension of career by vote or by appointment). Thus the “hear no evil” therapy, which is merely adding rules for extant fallibilities, are simply props for more of the same malaise.

Many rules, regulations, edicts or laws are imposed upon the “populist demand of the moment”, without the realization that rules, which tend to realign people’s behaviour, can cause huge unintended consequences and likewise entails costs of enforcement. Hence when new rules create distortions in the political economic order, the instinctive response is to have more of rules or regulations.

Importantly, popular clamor for new rules/laws hardly differentiates “rule of laws” against “rule of men”.

Rule of Law are in effect, the guiding principles or the laws that had been a legacy from our forefathers, as the great Friedrich August von Hayek wrote, ``Political wisdom, dearly bought by the bitter experience of generations, is often lost through the gradual change in the meaning of the words which express its maxims[1]”. (underscore mine)

This means because these laws have been constant, are anticipated by all and easily observed or practiced, they become part of our heritage. Again we quote the Mr. Hayek, ``Stripped of all technicalities, this means that government in all its actions is bound by rules fixed and announced beforehand.[2]”

In stateless Somalia, customary laws serve as default laws after her government had been eviscerated,

Benjamin Powell writes[3], ``Somali law is based on custom interpreted and enforced by decentralized clan networks. The Somali customary law, Xeer, has existed since pre-colonial times and continued to operate under colonial rule. The Somali nation-state tried to replace the Xeer with government legislation and enforcement. However, in rural areas and border regions where the Somali government lacked firm control, people continued to apply the common law. When the Somali state collapsed, much of the population returned to their traditional legal system... But Somalia does demonstrate that a reasonable level of law and order can be provided by nonstate customary legal systems and that such systems are capable of providing some basis for economic development. This is particularly true when the alternative is not a limited government but instead a particularly brutal and repressive government such as Somalia had and is likely to have again if a government is reestablished.” [bold highlights mine]

That’s simply proof that “rule of laws” exists even outside of the realm of governments, which also goes to show that society can exist stateless. None of this is meant to say that we should be stateless, but the point is rule of law is what organizes society.

Importantly, “rules of law” have been passed through the ages as a means to protect the citizens from the abuses of the authority, again Mr. Hayek[4],

``The main point is that, in the use of its coercive powers, the discretion of the authorities should be so strictly bound by laws laid down beforehand that the individual can foresee with fair certainty how these powers will be used in particular instances; and that the laws themselves are truly general and create no privileges for class or person because they are made in view of their long-run effects and therefore in necessary ignorance of who will be the particular individuals who will be benefited or harmed by them. That the law should be an instrument to be used by the individuals for their ends and not an instrument used upon the people by the legislators is the ultimate meaning of the Rule of Law.” (emphasis added)

In short, the fundamental characteristics of respected and effective laws are those that to limited, steady or constant, designed for the benefit of everyone and importantly a law that is clearly enforceable.

Of course this doesn’t overrule the occasional use of arbitrary laws, but nevertheless arbitrary rules should compliment and NOT displace the essence of the “rule of law”.

Mr. Hayek quotes David Hume[5], ``No government, at that time, appeared in the world, nor is perhaps found in the records of any history, which subsisted without a mixture of some arbitrary authority, committed to some magistrate; and it might reasonably, beforehand, appear doubtful whether human society could ever arrive at that state of perfection, as to support itself with no other control, than the general and rigid maxims of law and equity.”

In essence, in contrast to mainstream thinking, the rule of law and not simply arbitrary regulations, serves as the central element to well functioning societies.

Former President Ronald Reagan nicely captures part of our “Three Wise Monkey” solution as seen by the mainstream, “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”, from which I would add, “if subsidies are not enough, elect one who makes sure it would”.

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[1] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[2] Hayek, Friedrich August von, Decline of the Rule of Law, Part 1, The Freeman April 20, 1953

[3] Powell, Benjamin; Somalia: Failed State, Economic Success? The Freeman

[4] Hayek, Friedrich August von, The Road To Serfdom

[5] Hume, David; The history of England, from the invasion of Julius Caesar to the revolution, we earlier quoted this see Graphic: Origin of The Rule of Law