Bill Due for Welfare State

Democracy, Winston Churchill observed, is the worst form of government—except for all the others. That is one way of making the points that democracy is the best form of government, but that it cannot change the underlying realities that any government has to reckon with.

Ronald Reagan's election in 1980 made possible a big increase in the American military machine. That may have changed the world. It certainly had big consequences over time. Reagan did not, however, make conservative changes to the welfare state. He couldn't do so because the welfare state remained solidly popular among solid voting blocks.

The Democratic surge in 2008 made possible the passage of ObamaCare. That is likely to have more than marginal consequences. It does not change the underlying economic and institutional realities. Not only is the growth of the welfare state over, it cannot be sustained in its present form. Regardless of what happens in Washington or Brussels, the welfare state is going to contract in ways that Reganites could hardly have dreamed of.

My favorite economist, Robert Samuelson, explains why.

Government expansion was one of the 20th century's great transformations. Wealthy nations adopted programs for education, health care, unemployment insurance, old-age assistance, public housing and income redistribution. "Public spending for these activities had been almost nonexistent at the beginning of the 20th century," writes economist Vito Tanzi in his book "Government versus Markets."

The numbers -- to those who don't know them -- are astonishing. In 1870, all government spending was 7.3 percent of national income in the United States, 9.4 percent in Britain, 10 percent in Germany and 12.6 percent in France. By 2007, the figures were 36.6 percent for the United States, 44.6 percent for Britain, 43.9 percent for Germany and 52.6 percent for France. Military costs once dominated budgets; now, social spending does.

Conservatives like to focus on the dark side of the welfare state and it has a dark side. It was nonetheless irresistible because it made hundreds of millions of people more comfortable than they would have been or could imagine that they would have been without it.

Unfortunately for its advocates and now for pretty much everyone, conservatives were right about one thing. It was unsustainable.

To flourish, the welfare state requires favorable economics and demographics: rapid economic growth to pay for social benefits; and young populations to support the old. Both economics and demographics have moved adversely.

The great expansion of Europe's welfare states started in the 1950s and 1960s, when annual economic growth for its rich nations averaged 4.5 percent compared with a historical rate since 1820 of 2.1 percent, notes Eichengreen. This sort of growth, it was assumed, would continue indefinitely. Not so. From 1973 to 2000, growth settled back to 2.1 percent. More recently, it's been lower.

Demographics shifted, too. In 2000, Italy's 65-and-over population was already 18 percent of the total; in 2010, it was 21 percent, and the projection for 2050 is 34 percent. Figures for the European Union's 27 countries are 16 percent, 18 percent and 29 percent.

Until the financial crisis, the welfare state existed in a shaky equilibrium with sluggish economic growth. The crisis destroyed that equilibrium. Economic growth slowed. Debt -- already high -- rose. Government bonds once considered ultra-safe became risky.

There are exactly two things you can do with economic production: invest it or consume it. The welfare state works its magic by shifting every larger shares of production toward consumption. As long as developed economies were growing at an unusually high rate and population growth was contributing to that growth, the welfare state could expand without choking off investment in future growth. We may call this the happy time.

The happy time is over. Sorry. The consumption underwritten by the welfare state is now on the point of eating up all the wealth available for investment in new growth. That is the equivalent of eating your seed corn. The folks made comfortable by the welfare state may feel that they earned their benefits by working, but one thing they didn't do was have enough children to take care of them in their old age.

Short of some unlooked for miracle, the welfare state is going to contract, massively, regardless of who wins the next ten elections in America or any European nation. The task now is to manage that contraction. The sooner we recognize reality and take responsible steps, the less painful it will be.

I am not optimistic. Too much of our political culture is invested in protecting the welfare state at all costs. If we go down that road far enough, we are looking at something very dark.

Comments

[Donald Pay]

This is a pretty pessimistic, almost anti-American, entry. "The happy time is over," you say. What happened to conservatives who believed it was morning in America?

What happened, I suspect, is that too many conservative ideas were actually enacted, nearly ending the happy times for the middle class. See, the happy times are certainly not over for the wealthy. Our economy has provided an immense amount of growth but virtually all the wealth from all that growth has gone to the lazy parasites who sit on the top, while the productive classes are told they need to give up licking the crumbs the aristocracy brushes off the table.

What we really need is to end the "happy times" for the wealthy parasites, so that the middle class job creators can survive.

[Jimi]

Donald,

You missed the point! And...No.....I'm not surprised!

The point is that the bill is coming due, and there is not enough wealth at the top to steal from to lessen the pain. I don't remember any Conservative Policies demanding growth in government and government spending of the social satfey nets which got us to this situation.

The Great Society and The New Deal were not championed by Conservative thought. Maybe Al Gore's Lockbox has the real answer hidden inside!

[duggersd]

I was just reading my Imprimis yesterday and Phil Gramm had a piece in it. He was talking about America losing its character.
"If you want to see the effect of bad government policy on character, simply turn on the news and see how Greek civil servants have been behaving recently. They are victimizers behaving like victims. Greek government policies have made them what they are. But what made Americans who we are is a historically unprecedented level of freedom and responsibility. The real danger today is not merely a loss of prosperity, but a loss of the kind of character on which prosperity is based." I fear he may be right. If our country cannot keep the kind of character we have displayed in the past, there may be little hope for the future. Donald, if we continue the policies we have and the kind you continue to express, I am not optimistic. From your post, you have no idea as to where prosperity comes from.

[Mark Anderson]

All you Norwegians in South Dakota can just go back to Norway. Norway has it down.

[tedp]

Donald,

I doubt you know the first thing about creating either wealth or jobs. Your class envy is a dangerous manifestation of liberal identity politics. I am a "middle class job creator", and I would love to become rich. The expectation that I can keep a decent portion of what I earn is what motivates me to bust my hump and risk my capital. Otherwise I might be inclined to get a government job with cushy benefits and coast toward retirement at 55. Parasites indeed. Look in the mirror.

[Donald Pay]

tedp,

Careful, you're criticizing KB with his cushy taxpayer funded benefits, not me, wo who works in the private sector creating jobs for people.

[duggersd]

Donald:
I did not know you owned a company and paid people salaries. I know you said you were in the business of finding jobs for people with disabilities. How many people do you employ?

[Ken Blanchard]

Donald: I hate to break this to you, but the wealthy parasites are the middle class job creators. That aside, at some point one has to stop asking who is to blame and look at the damn ledger. I can well understand why you refuse to do that.

[Donald Pay]

The ledger? You actually want to look at that? OK.

The ledger shows a balanced budget before Bush became president, and Republicans were in control in Congress. There you go. Get rid Republican fiscal foolishness, and you get back to fiscal sanity.

[Dave]

Focus Jimi! FOCUS!!!

[lynn]

Norway has it down?! Well, their economy is doing well because of their oil well money. Uh, just what is our wonderful leader doing with our oil reserves??? Nothing!!! Maybe you should be telling O to look at Norway, not me.

That aside, the welfare state has become the easy way to get votes and sustain them for the Dems and libs and politicians in DC. Promise more, make them more dependent on the federal gov't, and they will continue to vote to keep their freebies. That's what O's mantra of hope and change was all about - bigger and bigger gov't, more dependents, less individual responsibility, and now on top of it all class warfare for this election cycle. Sad. If our nation does not wake up and smell the odor of the coming meltdown, it will be a disaster. And the benefits will NOT be there, and Greece will be here. We are already seeing it in the Occupy movement riots etc. They are demanding their due from the "rich," while hurting the very people they claim to want to help - the middle class. But it's all okay with O and his cronies as it is their ticket to a second term.