Ponzi Planet: The Danger Debt Poses to the Western World

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Why is this the case? For Lars Feld, the answer is short and unambiguous: "political failure." The 45-year-old Freiburg-based academic, the youngest member of the German Council of Economic Experts, which advises the government on economic issues, combines economic expertise with insights from other disciplines, especially political science. For Feld, the concept of "fragmentation" is essential to explaining the tendency to accumulate debt.

According to the fragmentation concept, debt levels increase the more parties are involved in the government -- and competition there is for funds among cabinet ministers to satisfy their respective constituents. The Americans refer to this as pork barrel politics. Each tries to take as much as possible while contributing as little as possible.

For politicians, this means: "Every member of parliament tries to bring as many public projects as possible into their election district in order to secure re-election, hoping to distribute the costs across the entire population," Feld explains. It is also true that the more often a government is replaced, the faster the government debt increases.

Is a Dictatorship More Responsible?

The reverse is also true. Strong governments with absolute majorities have the lowest tendencies to incur debt, especially when a powerful finance minister remains in control for a long period of time. Does this suggest that parliamentary democracy, which naturally promotes fragmentation, is to blame for unsound fiscal policy? Or, to put it cynically: Is a dictatorship more responsible when it comes to fiscal policy?

Aside from the fact that dictators have also been known to devastate their countries financially, voters ultimately have themselves to blame for the excesses. Scientists refer to "rational ignorance" when citizens deliberately avoid dealing with uncomfortable issues. People overestimate the benefit of current tax cuts and fail to recognize that today's debts are automatically tomorrow's debts, as well. In other words, people want to be deceived.

Politicians are all too happy to adhere to this pattern of behavior, while at the same time mercilessly taking advantage of it. In his dissertation, Berlin economist Gerrit Köster found that, between 1964 and 2004, German finance ministers tended to plan tax cuts so that they would come into effect in election years.

Perhaps this also explains why the Social Democratic heads of government in the city-state of Bremen remain popular, despite the fact that Bremen, with a per capita debt of €27,000, is Germany's most heavily indebted state. It is often precisely those municipalities that can least afford it that are the most lavish spenders.

Two Portable Toilets

Economist Adolph Wagner observed the phenomenon in the mid-19th century and used it to formulate his "law of expanding state activity." Wagner contends that the state constantly seeks new activities without paying heed to whether the expansion is even necessary and, most of all, whether it will pay off. Expansion serves primarily one purpose: to justify a government's existence. Many of the things for which cities, states and the federal government borrow money turn out to be pure waste.

From the €130,000 a year the northern city of Lübeck spent to rent two portable toilets to the €11,000 the western town of Büren paid for four alpenhorns so that local musicians could play music with guests from the Austrian sister town of Mittersill, each year Germany's taxpayers' association documents cases of how poorly government entities manage their funds -- especially when the economy is doing well -- and how little willingness there is to economize.

At least Bremen has now vowed to curb government spending. The state plans to reduce annual new borrowing from the current level of €1 billion to €120 million. It should be noted, however, that these figures apply to the gradual reduction of new borrowing, not the debt itself.

"Bremen can no longer extract itself from this debt spiral on its own," says Bettina Sokol, the president of the state audit office. But how else is it to do so?

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• Part 1: The Danger Debt Poses to the Western World
• Part 2: Of Good Debt and Bad Debt
• Part 3: Germany's True Liabilities
• Part 4: The Failures of the Political Class
• Part 5: Strategies for Reducing Debt