Welfare State: Death by Suicide

I can’t believe this opinion piece was published by the Washington Post! Below are excerpts from Robert J. Samuelson‘s “The welfare state’s death spiral” in today’s WaPo.
~Eowyn

Evolution of man: Ape to bloated welfare state


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.” 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 to a point….
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; they 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% of its gross domestic product (a measure of its economy); its debt, the accumulation of past deficits, was 115% of GDP. Spain’s deficit was 11.2% of GDP, its debt 53.2%; Portugal’s figures were 9.4% and 76.8%. 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% of the total in 2005 to 25% in 2030. For Spain, the increase is from 17% to 25%.
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%; wages for government workers will be cut 14%; the basic rate for the value-added tax will rise from 21% to 23%. These measures will plunge Greece into a deep recession. In 2009, unemployment was about 9%; some economists expect it to peak near 19%.
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 reassures 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.

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0 responses to “Welfare State: Death by Suicide

  1. While the article gives a realistic scenario of one possibility, the problem is easily solved if governments would stop the handouts for those who refuse to work. Just running the illegal aliens out of this country would give us another thirty years to figure out the solution, but as long as this or any other country has the handout mentality then the article will be a self fulfilling prophecy.

     
  2. We will be Greece in about three years – maybe sooner if Obama continues to blow money out the door by the trillions we do not have.
    There will be no one to bail us out.
    I see a global government coming right on the heels of our collapse, which I believe will happen virtually overnight.
    What happens next is going to be ugly.
    Damned ugly.
    -Dave

     

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