The Welfare State's Death Spiral

[JohnSmith2007 353]

The Welfare State's Death Spiral

By Robert Samuelson

WASHINGTON -- What we're seeing in Greece is the death spiral of the welfare state. This isn't Greece's problem alone, and that's why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven't fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.

Americans dislike the term "welfare state" and substitute the bland word "entitlements." The vocabulary doesn't alter the reality. Countries cannot overspend and overborrow forever. By delaying hard decisions about spending and taxes, governments maneuver themselves into a cul de sac. To be sure, Greece's plight is usually described as a European crisis -- especially for the euro, the common money used by 16 countries -- and this is true. But only up to a point.

Euro coins and notes were introduced in 2002. The currency clearly hasn't lived up to its promises. It was supposed to lubricate faster economic growth by eliminating the cost and confusion of constantly converting between national currencies. More important, it would promote political unity. With a common currency, people would feel "European." Their identities as Germans, Italians and Spaniards would gradually blend into a continental identity.

None of this has happened. Economic growth in the "euro area" (the countries using the currency) averaged 2.1 percent from 1992 to 2001 and 1.7 percent from 2002 to 2008. Multiple currencies were never a big obstacle to growth; high taxes, pervasive regulations and generous subsidies were. As for political unity, the euro is now dividing Europeans. The Greeks are rioting. The countries making $145 billion of loans to Greece -- particularly the Germans -- resent the costs of the rescue. A single currency could no more subsume national identities than drinking Coke could make people American. If other euro countries (Portugal, Spain, Italy) suffer Greece's fate -- lose market confidence and can't borrow at plausible rates -- there would be a wider crisis.

But the central cause is not the euro, even if it has meant Greece can't depreciate its own currency to ease the economic pain. Budget deficits and debt are the real problems; and these stem from all the welfare benefits (unemployment insurance, old-age assistance, health insurance) provided by modern governments.

Countries everywhere already have high budget deficits, aggravated by the recession. Greece is exceptional only by degree. In 2009, its budget deficit was 13.6 percent of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115 percent of GDP. Spain's deficit was 11.2 percent of GDP, its debt 56.2 percent; Portugal's figures were 9.4 percent and 76.8 percent. Comparable figures for the United States -- calculated slightly differently -- were 9.9 percent and 53 percent.

There are no hard rules as to what's excessive, but financial markets -- the banks and investors that buy government bonds -- are obviously worried. Aging populations make the outlook worse. In Greece, the 65-and-over population is projected to go from 18 percent of the total in 2005 to 25 percent in 2030. For Spain, the increase is from 17 percent to 25 percent.

The welfare state's death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day -- no one knows when -- doubt governments' ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.

Greece illustrates the bind. To gain loans from other European countries and the International Monetary Fund, it embraced budget austerity. Average pension benefits will be cut 11 percent; wages for government workers will be cut 14 percent; the basic rate for the value added tax will rise from 21 percent to 23 percent. These measures will plunge Greece into a deep recession. In 2009, unemployment was about 9 percent; some economists expect it to peak near 19 percent.

If only a few countries faced these problems, the solution would be easy. Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states. They might defuse the dangers by gradually trimming future benefits in a way that reassured financial markets. In practice, they haven't done that; indeed, President Obama's health program expands benefits. What happens if all these countries are thrust into Greece's situation? One answer -- another worldwide economic collapse -- explains why dawdling is so risky.

http://www.realclearpolitics.com/articles/2010/05/10/the_welfare_states_death_spiral_105503.html

[JohnSmith2007 353]

What will we do when our debt gets to this point? Cut services, raise taxes or both? The day is coming soon.

[Heracles 417]

What will we do when our debt gets to this point? Cut services, raise taxes or both? The day is coming soon.

Cut from the $1.3 trillion wasted on the military each year. Greece is a totally different ball game so it cannot be used as an example.

Though, it's funny you guys ignore examples of the third world, which tend to have repub economic ideals in practice. That's different of course and to be ignored. Ever heard of a third world country being a welfare state? Didn't think so.

More like:

• The majority of wealth is held by a small percentage of people,
  
• Substantial percentage of the country's budget is spent on military
  
• They let the market (businesses) decide wages
  
• Zero government assistance or investment in their country or people
  
• Each to their own is encouraged and
  
• Low taxes for the wealthy
  

This mentality ring a bell?

Edited May 10, 2010 by Booyah!

[Heracles 417]

So you are right Gary, who would want to be some second world Greece when we can mirror the third world.

[Obama 2012 1,714]

What will we do when our debt gets to this point? Cut services, raise taxes or both? The day is coming soon.

Our debt is already to this point....

Federal salaries and benefits are already through the roof and need to be cut drastically.

Do away with social security and force people to save on their own. Stop babysitting.

We should also close a few military bases around the world, and work on defensive development versus offensive development. There's no rhyme or reason for us to be in a country like Afghanistan where there is no real central/stable government. No matter what we do, they are going to be a tribal nation.

There's plenty of other places to 'cut' spending, just matter of getting rid of lobbyists and start doing what's right by the American people.

[Heracles 417]

Do away with social security and force people to save on their own. Stop babysitting.\

On what their walmart salary?

AUS has no SS, it's all private. Your employer has to contribute 9% of you salary into a retirement account of your choice, that cannot be accessed until 65. Last article I read, they now have the largest retirement accounts per capita.

They do also provide an age pension for people that have no retirement money and have less than x assets.

Edited May 10, 2010 by Booyah!

[JohnSmith2007 353]

So you are right Gary, who would want to be some second world Greece when we can mirror the third world.

FYI, I am not Gary. If it makes you feel better you can call me that though.

[Heracles 417]

FYI, I am not Gary. If it makes you feel better you can call me that though.

Pleeeeeease, you gave it away with you racism comment. You said that before, just before you vanished into thin air. Then when you mentioned mining and you are from IL, plus others comments, it made sense. If I recall you work at CAT, where my cousin coincidentally is a high up manager.

PS You should have at least picked another country other than Lesotho. That also gave it away.

Edited May 10, 2010 by Booyah!

[JohnSmith2007 353]

Pleeeeeease, you gave it away with you racism comment. You said that before, just before you vanished into thin air. Then when you mentioned mining and you are from IL, plus others comments, it made sense. If I recall you work at CAT, where my cousin coincidentally is a high up manager.

PS You should have at least picked another country other than Lesotho. That also gave it away.

I didn't say I was from Illinois. But like I said, if it makes you feel better.

[Usui Takumi 1,562]

If you do away with SS, you had better pay all of us back what we put in + interest.

Effectively we need a temporary and completely independent agency to conduct an audit of every aspect of our government starting with the military. The first thing that can be cut from the military are the officers. We have far too many Generals/Rear Admirals etc. With forced retirements we could save quite a bit. The real problem is that all of the budget oversight committees are a little too close to the cookie jar.

[SMOKE 1,426]

You should have at least picked another country other than Lesotho. That also gave it away.

where do you get gary from that?

[JohnSmith2007 353]

where do you get gary from that?

He just can't stand the idea of yet another person is out there that thinks he is an azzhat. His opinion means less than nothing to me. Let him think what he wants.

[Heracles 417]

If you do away with SS, you had better pay all of us back what we put in + interest.

What people have paid into SS would be reimbursed into private 401K type accounts of a person's choice; with restrictions that they cannot retrieve it until 65. Not only will Americans get more in return but the government will no longer be able to borrow on it.

Dems seem to be against this though. Ironically it was the left wing gov that introduced Superannuation - private retirement - into AUS. Australians now have over $1 trillion stored in private retirement accounts. US SS has $2.5 trillion and another $3 trillion in private accounts. Not hard to do the maths here consider Australia has ~14 times less population.

Effectively we need a temporary and completely independent agency to conduct an audit of every aspect of our government starting with the military. The first thing that can be cut from the military are the officers. We have far too many Generals/Rear Admirals etc. With forced retirements we could save quite a bit. The real problem is that all of the budget oversight committees are a little too close to the cookie jar.

Of course, I would never advocate getting rid of the military but there is clearly way too much wastage. I know a hell of a lot of people who work in the industry and am shocked to here some of the stories. Like being charged by a private company over $30K for a value that you could buy or make for $100.

Edited May 10, 2010 by Booyah!

[Heracles 417]

He just can't stand the idea of yet another person is out there that thinks he is an azzhat. His opinion means less than nothing to me. Let him think what he wants.

So everyone on here must be wrong too then? You took a few moths to recover after Obama's win. That seem to hit you hard.

where do you get gary from that?

Because he should have picked a less obvious country.

Edited May 10, 2010 by Booyah!

[Mr. Big Dog 10,747]

So everyone on here must be wrong too then?

Yes. Gary wasn't exactly a single payer guy. According to this here post (and others in the thread) JS'07 is.