After the Brazilian government devalued the Brazilian real, causing the Brazilian people to lose more than 40 percent of their savings, the Brazilian authorities issued the customary line that governments follow after a devaluation. They blamed external forces for the currency debasement, in this case “the Asian currency collapse.”
Actually, however, the responsibility for the Brazilian monetary devaluation rests with the Brazilian officials themselves and, indirectly, with the Brazilian people.
Article 6 of Chapter 2 of the Brazilian constitution states that “education, health, work, leisure, security, social security, protection of motherhood and childhood, assistance to the destitute, are social rights, as set forth by this Constitution.” The Brazilian government, in other words, is constitutionally mandated to provide paternalistic care to the Brazilian citizenry.
The Brazilian government, however, is not a fountain of wealth that is able to bestow free goodies on the Brazilian people. The only way the government can provide these “rights” to the citizenry is by using the force of government to take the money required to pay for them from the citizenry themselves.
For example, assume that the government promises to provide education that will cost $100 million. To accomplish this feat, government officials must first tax the citizenry $110 million. (Politicians and bureaucrats need to be paid for providing this service – thus the extra $10 million.)
The problem, of course, is that while people love the “free” education, they hate to pay the taxes that are necessary to fund the “free” education. The demand for expanded “rights” to paternalistic care inevitably collides with people’s resistance to higher taxes. As the 19th-century French free-market legislator Frederic Bastiat put it, the government becomes the great fiction whereby everyone is trying to live at the expense of everyone else, while at the same, doing his best to protect his own pocketbook from being plundered.
If people resist the payment of more taxes but, at the same time, demand “rights” to health care, education, food, and other welfare assistance, what does the government do? Historically, once direct taxes get too high, governments have resorted to the printing presses to tax the citizenry indirectly through currency debasement. Ever-increasing amounts of paper money are printed to pay for the ever-increasing welfare programs that the citizenry are demanding.
Everyone is happy for a time. The citizens are happy because they’re being taken care of without having to pay higher taxes. The politicians and bureaucrats are happy because they are distributing largess (and purchasing votes) without having to raise taxes.
Gradually, however, the market begins to discover that there are a lot more reales circulating than there were before. It’s supply having been increased in the marketplace, the inflated currency begins falling in value relative to other currencies. Speculators and others begin turning in reales in exchange for dollars and other currencies. Finally, unable to stand “the run on the bank,” the central bank devalues the currency to reflect the market’s true valuation of it. Thus, the citizenry end up paying for their “free” paternalistic care through massive losses in the value of their savings.
Of course, government officials always blame the usual suspects for the monetary debacle: speculators, profiteers, capitalists, businessmen, even foreign monetary crises.
The end result is a society that is more impoverished than it was before the whole process began. As a result of taxes, inflation, and devaluation, people have less money to pay for their education, medical care, and the daily needs of life. Unfortunately, the process then begins anew, as people cry out: “We are suffering from the monetary crisis. We need government assistance.”
There is one – and only one – solution to all of this, both for the Brazilian people and for people all over the world: constitutionally prohibit government from providing education, health care, old-age assistance, and all other welfare assistance to the citizenry, and constitutionally prohibit the massive taxation and monetary debasement required to pay for all of it.
As Adam Smith pointed out in his treatise An Inquiry into the Nature and Causes of the Wealth of Nations, the key to a wealthy and stable society is a counterintuitive one: prohibit government from combating poverty. Economic liberty and constitutional limitations of government power hold the key to the future prosperity and stability of Brazil and the rest of the world.
Mr. Hornberger recently conducted a seminar on the U.S. Constitution for the Institute for Entrepreneurial Studies in Porto Alegre, Brazil.
