One of the most classic contemporary idiomatic phrases is the notion of a “Castle in the Air” or an unattainable pipe dream that consumes people’s attention.  These visions and fantasies are frequently associated with gambling activities such as the Lottery where there is an large prize offered that contestants have an extremely small chance of winning.  (In exchange for which the state takes a profit margin that frequently exceeds 20% . . . that kind of rake would make Tony Soprano jealous)

One of the things that is becoming very concerning about the current political environment is that castles in the air are no longer reserved for long-shot gamblers.  They are now the province of almost every proposal that is propagated by elected officials.  A dangerous sentiment has evolved that firmly believes government can simply make a law, and that the economic markets will align themselves to deliver on their promises.  Unfortunately for those in power, reality runs exactly counter to this sentiment.

If the government decides that it needs to increase taxes and regulation to provide increased social benefits such as health care, it will necessarily decrease the amount of economic activity.  The reason for this is because all things (both natural and financial) exist in an equilibrium.  Whenever a change is made to one part of a system, it shifts the equilibrium.  When taxes are increased, it decreases the incentives to grow production.  When government funded benefits are increased, it decreases the incentives to be self-sufficient.

Evidence of this can be found in the many state budget disasters that are currently sweeping the nation.  The states that have experienced the biggest budget hit from the recent recession are the ones that rely on the top producers for the majority of their tax revenue.  The reason why top-heavy taxation creates high levels of revenue volatility is because both expansions and recessions start at the top of the affluence scale.  When the economy expands, business owners realize more profit and when the economy contracts, business owners must absorb the losses.  (Unless they are deemed ‘too big to fail’ by the government, or employ a large union with an underfunded pension)

When the economy goes into contraction, the high-end tax revenues disappear because the high-end income disappears.  In response to this problem, most states concoct the genius solution of increasing upper income taxes even higher.  This frequently results in an ‘affluence flight’ out of states like California and New York with extremely high levels of taxation for top producers.

The fundamental problem that California, New York, Greece, Italy (and soon the whole United States) are encumbered under is the fact that it has built castles in the air of vast social benefits and public subsidies that are impossible to sustain.  Attempts to sustain these ‘upside down’ economic models have resulted in large amounts of public debt that are expected to end up creating inflation as central banks simply print money to satisfy the debt obligations.  Investors are becoming wise to this liability and are beginning to demand higher rates of interest on government debt in exchange for this risk.

In the end, it is extremely likely that the global governments will either partially or completely default on their ‘castle in the air’ promises of benefits and entitlements.  When the cost becomes too high, and the number of people willing to continue buying debt becomes too small, the only choice will be to reduce costs by cutting benefits, inflating the currency, or releasing employees.  (This insight is not intended to be political in nature . . . it is just math)

For those who wish to build a future of happiness and prosperity for themselves and the people they care about, castles in the air must be avoided at all costs.  There is great temptation to believe claims of easy entitlements, but the people who are dependent on the government are going to be the ones who are impacted the most severely when the promises are inevitably broken.  The castle of your future must be built on the ground and should be owned by you.  This will enable you to create a future for those whom you care about and also create the ability to personally help some of the people who will be devastated when the castles in the air disappear into a cloud of smoke.

Give Back . . . Or Else!!!

One of the ideas that has gained prominence in recent years is the notion of giving back to the community.  My initial reaction to this sentiment was one of encouraging acceptance.  Humility and generosity is an important part of being successful, as it represents a mindset of abundance where we are not so paralyzed with fear of loss that we are afraid to give.

However, I have noticed that this concept has (d)evolved from one of gratitude for charitable giving to an expectation of a certain amount of giving that is directed toward certain causes and is punishable by scorn and ridicule if the expected conditions are not met.  The ante on this spiteful charity has been raised even higher by some who advocate that the government should ‘take’ the money and give it to the ‘right’ people so that people will be relieved of the choice to not give enough or give to the wrong people.

To this sentiment, I must ask whether forced charity is really charity?  Does using the authoritarian power of government to seize resources for the benefit of favored causes really count as benevolence, or is it simply tyranny that is wrapped inside a human(ish) face?  The act of giving involves voluntary self sacrifice . . . when ‘giving’ becomes mandatory, it crushes the voluntary nature that forms the fundamental underpinnings of real gratitude and charity.