It was a great idea. Government would provide for the needs of its citizens, including the least and the lowliest. No one would lack adequate health care, housing, education, or, let us not forget, income. Of course, just getting these things is not enough. Everyone must be relieved of the fear of losing them in the future. So the doctrine of welfare breeds the expansion of entitlements. Government would ensure that everyone, or at least members of the public employees unions, are protected against the harsh realities of economic exchanges.
But health care, housing, education, along with food, beer, DVD players, and cheap automobiles, have to be grown, brewed, or built by someone. The free market grows, brews, and builds by continually re-investing a portion of the profits made into future production.
In theory, the welfare state works by taking some of the good stuff away from the rich and delivering it to the not so rich. In practice, it takes away from the more productive and gives to the less productive. Inevitably, it eats into the capital available for reinvestment in future production. If this goes on long enough, the engines of economic growth begin to sputter and die.
We may be at the tipping point. Greece is going belly up, as its workers riot against sensible reforms, and it is threatening to take Europe's economy down with it. But American investors have been warned that California is a greater threat than Greece. California, more than any other American state, has tried to realize the welfare state in its final form. It succeeded.
Earlier this week, the state's legislature passed bills that will cut the deficit by $2.8bn through budget cuts and other measures. However the former Hollywood film star turned politician is looking for $8.9bn of cuts over the next 16 months, and is also hoping for as much as $7bn of handouts from the federal government.
Now consider that $7,000,000,000 that California wants from the Federal Government. Where is D.C. supposed to get that money from? China? But China is going belly up as fast as Sacramento. Washington will have to get it, if it does, from states that haven't yet invested all their working capital in public employee unions. That will mean less investment capital for future growth in those states. Are we getting the picture?
The welfare state is in crisis because it has brought the economies of the world's most productive nations to the edge of disaster. There might be a way to repair the engine of economic growth while preserving some of the welfare state's humane agenda. But Washington isn't worrying about that. All the attention of Congress and the White House is focused on getting enough votes to secure a new, multi-trillion dollar, health care entitlement.
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