The Decline and Fall of The Modern Welfare State

The problems of Greece have been much in the news of late. Because such problems are not unique to Greece, we prepared the following last year as an article for another publication we issue quarterly. We have edited this article slightly to update it, but the problems it discusses have not  changed over the course of the past year. These problems are endemic to the modern welfare state. They illustrate the concepts discussed in the V-50 lectures concerning the rise and fall of civilizations.

Ancient Rome self-destructed when it became a welfare state which could not keep its promises of benefits to citizens or even afford to maintain its military power. Once mighty Rome, which conquered easily the peoples of much of Europe, fell to invasion by “barbarians” from the north. However, Rome had deteriorated so badly that its citizens welcomed the barbarian destruction of the Roman state as an improvement in their lives.

GREECE AND EUROPE; CALIFORNIA AND THE U.S.

Greece is a small country, with a population of 10 million in an area the size of Mississippi and a GDP less than one-fourth that of South Korea. Yet Greece has become a symbol of the financial troubles plaguing many other countries. The government of Greece has been spending far beyond its means in recent years. One in six Greek workers is employed by the state, usually in a job guaranteed for life.

The state railway system of Greece maintains a payroll four times larger than its ticket sales. When a military officer dies, his pension continues for his unwed daughter as long as she remains unwed. Various state workers are allowed to retire with a full state pension at age 45.

Taxes in Greece are high but government spending is even higher. Tax evasion is rampant. Citizens in the private sector of the economy cannot and do not want to support the current level of government spending.

Last year the Greek government admitted the country was bankrupt. Its current budget deficit, 12.7% of GDP, is more than four times the limit allowable under rules set by the European Union (EU) for the sixteen countries using the euro. Greece’s credit ratings have been downgraded steeply, making borrowing much more expensive for a government that must borrow heavily to continue operating.

Out of concern that the financial collapse of the government of Greece could spread elsewhere in Europe, the EU and the International Monetary Fund (IMF) pledged loans of 110 billion euros ($140 billion) over the next three years to avoid a debt default. In exchange, Greece had to accept an austerity program, cutting government employee wages and benefits, demanded by the EU and IMF.

Protest riots in the streets of Athens left three people dead a year ago, and have continued unabated since then. The protests are as much about general discontent with life in Greece as about cuts in state spending. Unemployment is very high, especially among the young, due to the high costs of the Greek welfare state which has caused economic stagnation and stifled the growth of employment in private commerce and industry.

Most Americans would be surprised to learn that, because the U.S. provides much of the funding for the IMF, in effect Americans are paying some of the costs to bail out Greece–at a time when many Americans are suffering from a severe economic downturn in their own country. A leading American economist commented that “. . . with Greece’s money wages and government debt too high, the IMF-EU relief effort does not add any new options. Instead it delays default by offering yet more debt as a solution to too much debt.”

Greece is not alone. According to the New York Times, “. . . all over Europe governments with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead. With low growth, low birthrates and longer life expectancies, Europe can no longer afford . . . its generous vacations and early retirements, its national health care systems and extensive welfare benefits.”

The state of California now has a budget deficit that, on a percentage basis, is as large as that of Greece. Just as Greece looked to the EU for a bailout, so is California looking to the U.S. government for bailout money, some of which has already been flowing from the  $787 billion federal stimulus package of 2009 to subsidize state and local government payrolls in California, and other states as well.

Such problems are not unique to California. Forty-six out of the fifty states are now running budget deficits.  Within many states, local governments are also in bad shape financially.

Adding to the perilous financial condition of the state of California, the California state employee retirement fund is asking the state for an immediate infusion of $700 million dollars to bolster its underfunded pension fund, and the state teachers’ retirement fund will also have to ask for more tax money, as it is underfunded by $42.6 billion.  In many other states public employee pensions and health care benefits are turning out to be more costly and less affordable than anticipated. How this all came about has been examined in a number of recent books and a great many articles in the print media.

Even though a significant part of the recent $787 billion federal stimulus appropriation has already been directed to state and local governments, officials from states across our country are talking openly of seeking more bailout money from the federal government. The twofold problem with a federal bailout of state and local governments is (1) in the long run the federal government can only get money by taxing citizens of the several states; and (2) the federal government, with its $62 trillion of debt ($550,000 per household) is already in the position of needing to reduce spending, not increase it.

NOTE: The federal government has an acknowledged “public debt” of about $14 trillion, but there are also unfunded liabilities of about $48 trillion for future costs of entitlement programs including Medicare, Medicaid and Social Security.

It is a positive sign for America that responsible members of the federal government are aware that the U.S. must mend its financial ways. A bi-partisan commission appointed by the President in 2010 warned that the U.S. must depart from its present course of spending because it is unsustainable even with far higher taxation. And this year, ten former chiefs of the White House Council of Economic Advisers, from both parties, warned that if the U.S. does not get its national debt under control, the result will be “a crisis that could dwarf [that of] 2008.” Even Congress is becoming aware of the need for turning away from the path of ever increasing debt. The U.S. Senate voted this past spring 97-0 to reject the President’  proposed budget for next year with its projected deficit of $1.6 trillion and no cuts in federal spending.

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