The welfare state's death spiral

Discussion in 'Economics' started by Tom B, May 10, 2010.

  1. Tom B

    Tom B

    The welfare state's death spiral

    By Robert J. Samuelson
    Monday, May 10, 2010; A17

    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.

    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 countries using the currency averaged 2.1 percent annually 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 in loans to Greece -- particularly Germany -- 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; 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 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 53.2 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 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.
  2. I can't think of any valid arguments to the contrary.
  3. karma is a bitch, isn't it?! ... decades of exploiting weaker countries led western countries to the wealth they enjoyed for some time ... but all that is coming to an end ... western countries are the grannies of the world, a population of hags with attitude ... can't come up with a solution to their problems ... and like always having no regard no respect for anyone but themselves, not even the future generations, these old hags are printing their fucked up economies into total annihilation

    bye bye suckers
  4. TGeithner wrote ""western countries are the grannies of the world, a population of hags with attitude ""

    LOL...true, and the effects are and will be sad, but still funny to read it...:D
  5. Mav88


    ...and the roots of this problem are that you cannot tell liberals and their constituents that there should be strict economically sensible limits to welfare benefits. American liberals refuse to believe, even when shown the numbers which demonstrate it, that their welfare benefits are causing an unsustainable economy.

    Liberalism is now religion to many, see you guys in hell.
  6. clacy


    Socialism is the scourge of the earth right now, along with Islamic terrorism. Both ideologies threaten to take the entire world into the abyss.

    They must be stopped!
  7. Mav88


    Watch california, the cradle of the american left thinking, watch them refuse to responsibly handle their benefit problems, watch the protests and riots happen.
  8. Greece just got through showing them how. Instead of cutting back to live within the state's means, just riot, throw some rocks and fire bombs... somebody will print some money and give it to you.
  9. Socialism is preventing race to the bottom.
    Capitalism is promoting race to the top.
  10. MKTrader


    The typical response is "Bush did this...Cheney did that." When you point out that (a) Obama has out-spent Bush and every other President by a long shot and (b) If Bush’s wars are so costly, why don’t the Dems send our troops home (I thought that’s what they wanted…what happened to all those bumper stickers)?, you either don’t get a response or get another nonsensical one.

    I wasn’t a fan of Bush either, BTW, but I’m tired of hearing his name every time current problems are brought up.
    #10     May 10, 2010