Iceland’s Political-Economy: The Good, The Ugly, & The Inconsistent

This is a mixture of the good and the ugly, and a powerful example of the inconsistencies of men.

From Bloomberg: “Let Banks Fail Is Iceland Mantra as 2% Joblessness in Sight.”

Iceland let its banks fail in 2008 because they proved too big to save.

Now, the island is finding crisis-management decisions made half a decade ago have put it on a trajectory that’s turned 2 percent unemployment into a realistic goal.

While the euro area grapples with record joblessness, led by more than 25 percent in Greece and Spain, only about 4 percent of Iceland’s labor force is without work. Prime MinisterSigmundur D. Gunnlaugsson says even that’s too high.

The Good: Iceland let the banks fail—what should have been done all over the Western world.

Though bank creditors, many of them hedge funds, are still trying to recoup their money, Iceland’s approach has won praise from the International Monetary Fund and from numerous economists, including Nobel Laureate Paul Krugman.

The Ugly: Whenever Paul Krugman is giddy, you can be fairly certain the discussion involves something economically immoral and/or unsustainable, like massive State Welfare schemes.

The Inconsistencies: Letting the banks fail wisely allowed people to feel the sting of their own stupidity—it taught bankers and investors that there are consequences for foolishness. This should serve Iceland very well, for a time.

State Welfare spending, on the other hand, is very often the exact opposite: bailing out foolish individuals, and robbing the prudent to give their money to someone who didn’t earn it.

This is akin to what the U.S. did in bailing out the banks—we robbed citizens to pay for the mistakes of the wealthiest and most powerful.

Charity is a great and moral undertaking. It allows the individual to freely share his or her own earned blessings, and to give a neighbor a hand-up—with the natural accountability that follows from a person giving his own money (if I help people and they repeatedly spend my gifts on further harming themselves, or on unnecessary luxuries—cell phones, cable TV, video games, name-brand clothing, etc.—I can stop giving).

State welfare, on the other hand, is perversely incentivized to justify its existence, and the more people it can coax onto the welfare rolls, the more necessary bureaucrats can make themselves appear. Holding welfare recipients accountable, or truly helping them become productive, puts the bureaucrat out of work, so there is a strong incentive not to see those things occur.

The next time a banking crisis happens (and it’s, sadly, almost certainly coming soon), we should seek the good, the good, and the consistent:

1. Let the banks fail. Put them in bankruptcy, and let the prudent buy their assets. Teach business leaders once again that they need to be more circumspect in their investments, especially when dealing with overly profligate governments, seeking to enslave their citizens with debt.

2. Privatize charity. Allow citizens to give of their own resources, and to private community outreaches that express their own beliefs and worldview. Allowing politicians to buy votes with other peoples’ money is both foolish and immoral, and it virtually never provides authentic, freeing help to those who need it.

3. Be Consistent. Allow the foolish and lazy to feel the pain of their choices. Stop stealing from those who earn money in order to give to those who haven’t. Reestablish belief in the value of hard work, and bettering oneself through ongoing education. Support charity that is truly charity, not simply a political ploy for someone else to maintain power.