The Fiscal Nightmare of the Welfare State
Bloggers post what they claim to be the “scariest economic chart” or the “chart of the century.” Indeed, many data sets are frightening, but none more so than the tables found here (PDF). Jagadeesh Gokhale compiled these figures on European debt. This data shows incontrovertibly that modern government has failed. These countries are all insolvent and will eventually default. (See Table 1, Page 8.)
All Western democracies are on death row. The unlimited welfare state is the cause. Some governments are delusional, believing they can continue on their present paths. Others cling irrationally to hopes of some miraculous reprieve. All are dead men walking.
Government has always been inefficient and mostly ineffective. For most of history that was inconsequential, because governments had limited roles. Monarchies and various forms of authoritarianism had no reason to buy votes. That changed when participative government was instituted. The dangers of participative government devolving into democracy were well understood:
A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship — Alexander Fraser Tytler, 18th century historian and jurist
Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide. – John Adams
In the 1880s Otto von Bismark instituted the first welfare state. Other governments followed with varying time lags. The Progressive Era in the U.S. created the Federal Reserve and the federal income tax, both in 1913. They provided powers to the federal government never intended by the Constitution. In the late 1930s, the U.S. started a social security system, the last developed country to do so.
Once democracy was unleashed, citizens voted themselves benefits. Keynesian economics assisted politicians in their quest for votes. James Buchanan and Richard Wagner observed in Democracy in Deficit:
With the completion of the Keynesian revolution, these time-tested principles of fiscal responsibility were consigned to the heap of superstitious nostrums that once stifled enlightened political-fiscal activism.
The last barrier to fiscal irresponsibility was removed in 1971 with the introduction of universal fiat currency. In the last 50 years, the U.S. has not had a true surplus. Keynes’ theory, which envisioned deficits in slow economies offset by surpluses otherwise, was co-opted by the political classes. In less than seventy-five years, all welfare states were insolvent. To illustrate this point, the U.S. will be used.
The U.S. government has $12.5 trillion of funded debt, almost 90% of last year’s GDP. That is a critical level according to Reinhart and Rogoff based on their 800-year study of sovereign bankruptcies. Serious, funded debt is not the major problem. Unfunded entitlements (Social Security, Medicare and Medicaid) are. These are estimated to be $106 trillion.
The gross domestic product of the U.S. was $14.1 trillion last year, meaning total debt was 840% of GDP. But the Gokhale table shows the U.S. at 500% of GDP rather than 840%. That number reflects the present value of the unfunded liabilities out to 2082. The larger number, provided by the trustees of the plans, is based on an infinite time horizon. (Gokhale provides the rationale why this horizon is proper in his study on page 4.)
The study shows European debt at 484% of GDP, but this seriously understates their liabilities. The study reflects numbers only out to 2051. Were the numbers calculated to 2082, they would be larger than the U.S. number. Furthermore, if the calculation were done on an infinite time horizon, it would exceed the U.S. figure of 840%.
Gosh, it’s so darned complicated. You spend a lot more money than you take in. Hmmmm, sounds a lot like when I was a kid out of college. I never used to think about tomorrow and just spent more than I earned. The politicians in Washington are the same as young people with credit cards. They keep on spending and never think about the consequences. But I grew up and realized that the only way to survive was to save money and not spend more than I earned. Problem is, the people in Washington never seem to learn that lesson, and they never seem to grow up.
Obviously, because it is not their money they are spending, and spending it for particular constituents is what keeps them in power (and money).
Actually, the political class shows less fiscal restraint than a spoiled 13 year old girl with free use of her Daddy’s platinum card. They spend our money to buy votes, and when they can’t get enough of our money, they borrow and print more to fund their unlimited political greed.
The spoiled 13 yr old can expect to be chastened by her father once the bill comes in the mail. The politicians have learned that they can expect to be rewarded with re-election for spending profligately.
There are only 4 ways to spend money: 1. Yours on you (value); 2. Yours on someone else (frugality); 3. Someone else’s on you (extravagance), and 4. Someone else’s on someone else (value + frugality but spent on as many as possible). That’s it.
They spend our money on themselves wastefully & extravagantly – and of course, it has to be the best. (Nancy Pelosi’s private jet, stocked with nothing but the finest of spirits & snacks, comes to mind here.) They spend our money on others but it’s not the best (public transportation, public housing, public health care, public food programs all come to mind here.) but the end result is vote-buying.
Limited government as set forth by the founding fathers in the Constitution and Declaration of Independence is key to the longevity of the country. The government is there to serve the people, not the other way around. We need fresh ideas; ideas that can work to rebuild our country and take back our government. That is exactly why I support Doug Keller in the 1st Congressional District of Oregon. He is exactly the type of candidate we need to support. He is a leader. He has ideas that can work. I encourage you to check out his website. Tell your friends too. We cannot take back the country without you!! http://keller4congress.com/platform/
40% of Americans pay no federal income tax. That must stop. It’s time to eliminate the whole troika of deductions.
Local radio reported this morning that it’s closer to 47%. Almost half the country pays nothing in federal income tax.
Benson@2: “The government is there to serve the people…” Unless I am mis-reading you, this is the thinking that got us into the mess were in. The government is NOT here to serve the people. Geez. What clause is that written in? I thought the role of government was national defense, fair trade and securing individual liberty?
It is the entitlement mentality of that statement you made that has ruined our nation and made the public dependent upon the government. Now for the progressives that is fine because it gives them power over the American citizen. But for the rest of us, we see it as our loss of individual sovereignty, freedom and dignity.
Semantics blotto; you’re being a little too hard on Kirk. He’s using “serve the people” in a different context than you are, although I get your point.
Debates on if we should scale back the welfare state are amusing to me at this point. The only debate is how. Scale it back hard starting right after elections this year. Or, watch it all collapse within a decade or two and start over with the Constitution. That’s the debate.
Good article. The more time passes, the more a consumption tax like the FairTax looks. That would put an end to most of the government’s shenanigans right away.
None of this is going to matter. We are having conversations about the color of the fur on the wild animal that is about to consume us. Everyone takes their own opinion so seriously. Remember, the elected elites don’t know your opinion, and if most of them knew it, they would not care. Unless this election cycle really eliminates these socialists, we will have lost our deomcracy and freedom will soon follow.
No, our freedom will not follow; civil war will follow. We won’t go down without a fight.
Obama IS accomplishing one massive task; DESTABILIZING THE PLANET EARTH.
In both economy and security.
The next administration will have a tough task of repairing the standing with our prior allies after this administration is finished with it’s bumbling destruction.
Nations or electorates will never choose austerity; they have it thrust upon them by circumstances. In modern times the circumstance is self-sabotage. Modern progressive nations have spent years and years diligently working at self sabotage, simply by living increasingly beyond their means.
The National Center For Policy Analysis (NCPA) report referenced in Mr Pelerin’s article estimates the damage for 23 European countries. Like all studies that discount projected future streams of costs and revenues I’m sure the results are sensitive to those assumptions. For example, his measure of Fiscal Imbalance has to be very sensitive to those assumptions. From a quick read I didn’t see any sensitivity analyses but it’s a really interesting paper – thanks to Monty Pelerin for pointing to it.
The paper confirms that all those magical bank accounts in the sky are fading like a cheap print that is exposed too long to daylight, now that the government con-men are running out of other people’s money. Because the “other people” providing most of the money are sovereign states, not private banks, the debtors will have to repay the debt partly in policy changes that are dictated by their creditor nations. So these policies of self-sabotage aren’t just destroying a debtor nation’s wealth – they are also compromising its sovereignty.
Cold reality will trump every alice-in-wonderland government policy, every fatuous pronouncement, every social engineering fantasy and every unearned/unfunded entitlement. We all need to find ways of reacting to, surviving and somehow prospering at the end of an era. Fun times this is not.
Fingers got stuck in the keyboard: – the NCPA study includes 23 European countries, the EU as a whole AND the US.
Income must meet or exceed outgo. True, but not at all profound.
But this is the methodology(fiscal) by which democracies fail; not the cause of their fated failures.
The basic fallacy of democracy is the notion that most voters are virtuous and intelligent. Neither consideration is true. The devisers of IQ tests say that 25% of our population is plainly mentally deficient. Another 25% ranges from almost deficiemt to almost average. The remaining 50% are average or above.So, about 50% are not able to fully grasp complex issues, particularly when twisted and misrepresented by the media.
As to virtue, when we apply God’s standard, the New Testament, in various samplings, we find that only a tiny minority understand that we must obey Jesus Christ to be saved from Hell and rewarded with Heaven.Consequently, only a tiny minority, four out of each thousand? choose to behave so as to be saved and rewarded. Why should we not detect those four and put them in charge?
I’m inclined to believe the salvation rate is a lot higher than .4%, but even so, finding virtuous people ready, willing and able to govern is easier said than done. Besides that, the wicked refuse to be governed by the righteous, for they reject God.
To myth buster: Ones hopes your estimate is more accurate than the various samples. Thank you for the Jn.3.19-20; Rom.10.3 interjection. And, amen to that! It follows then, does it not, that democracy is an impractical dream; an unworkable scheme, because the human component necessary to its success is lacking. Unless, of course, a substantial majority could be brought into a state of righteousness. That might come to be true in a particular polity at a given point in time; but not, Mt.7.13-14, in the general scheme of things.
Why am I wrong to suppose that if persons are virtuous and intelligent they are, in fact, able to govern, and, that virtue requires them to do so?
What follows is that John Adams was right, “Our Constitution was made only for the government of a moral and religious people; it is wholly inadequate for the government of any other.” You are not wrong to suppose that we need righteous people to rise to the occasion and govern, but the problem is that when the people lose faith in their government and expect it to be corrupt, they chase all the honest people away from government. Who wants to be branded a liar and a thief by the people they came to serve? Even Jesus’ patience is not infinite.
True, and thank you!
But, His commitment was both self-sacrificial and total, and we are to emulate it, Jn.15.12, if we love and obey Him, Jn.14.15, ie, do the will of God, Mt.7.21, and are, ergo, righteous; justified by our, Gal.5.6; faith that works through love.Because we pass from death to life because we love, IJn.3.14; and He saves those who obey Him, Heb.5.9.
To love Him is to obey Him, IJn.5.3; and, ICor.16.22, those who do not love(obey) Him are in big trouble!
On to the fray!!!
Absolutely true Monty, we do not know half the story on financial mismanagement yet. Bizarrely however I was reading an outline of how the new hi tech and green industries will dive the recovery a few dauys ago. The cloud cockoo land thinking behind it is even more frightening to contemplate than the reality of the debt crisis.
No real jobs in the new economy
Kirk Benson seems to think that politicians exist to serve the people. After the 1906 San Francisco earthquake destroyed that city, California politicians wanted the Federal government to pay for the rebuilding of the city. President Grover Cleveland told them that “The people support the government. The government does not support the people.” Contrast that with Hurricane Katrina. The Feds coughed yp and are still coughing up billions.
Whenever some suggestion is made to cut spending the response is that it is only a tiny, little percentage of the total budget so it is too small to maytter and nothing is ever cut.
At this rate the country is doomed to bankruptcy once people or countries quit buying our debt. Of course the polticians don’t care because they think their pensions will be safe and the crash won’t come for years. I think the Tea Partiers need to march up Pennsylvania with pitchforks and ropes.
So, what do we do? Other than voting in a Republican Congress, what else can we possibly do? For one thing, we can’t live like we’re waiting for the other gigantic shoe to drop, that is, other than making whatever preparations we can for survival in a rougher world. It makes the most sense to do the best we can with the hand dealt to us, while living the kinds of lives we believe make for a free society.
Reversing and dismantling the modern welfare state would be akin to the Italian campaign in WWII. The Germans had booby-trapped the peninsula all the way up to the Alps. It was slow, rough going for the Allies. The American system is as thoroughly compromised as a minefield.
I don’t mean to be discouraging, but sobering. We won’t restore our country to some condition that we consider an ideal, so we must come up with alternatives that allow those ordinary citizens who are resourceful and freedom-loving to find ways to steer clear of the federal government and state-level intrusions as much as possible. We will be like “illegal aliens” in our own land. Good luck to us!
The one thing they forgot to tax is loans. Write to me at gwcusa@gmail.com and I can show you how to generate $100,000 a year in mortality loans that run at 1% interest per year simple not compounded and only have to paid back from earnings over $100,000 per year or after you are dead with life insurance proceeds paid for by the company from your excess earnings. As a loan, none of its taxed and its all under the government radar. It fits in with what you are saying exactly.
How is all that hope and change working out for everyone now! We can still return to a Republic peacefully, but it won’t be easy. We can no longer let any leftist nonsense go unchallenged. A verbal war can be won, but a successful armed revolution to create a Republic was a ONE TIME MIRACLE that would be unlikely to ever be successful again. Campaign for their ouster and vote them all out in November!
No fair tax, VAT or national sales tax should ever be considered until and unless the 16th Amendment is repealed. I don`t trust the federal gov`n one bit. They could easily pass a law eliminating the payroll tax, enact a `fair tax` and later reinstate a payroll tax. After ramming through health care they would do a-n-y-t-h-i-n-g.
“We came all this way for this!”(Oysterband) Ever since Europe emerged from the so called “age of enlightenment”,its history has been dominated by a fascination with suicidal ideologies.Whether it was monarchism,nationalism, imperialism,national socialism,Communism,Post modernism, and welfarism:all led to unspeakable chaos and the mass murder of tens of millions. “Sophisticated” Europe has been on a 400 year old death ride.Hopefully, this really will be the end of this hysterical loony bin crowded with homicidal charlatans peddling mind poison.Turn ‘em over:They are done!
The only answer is to create more hard money without inflation. Money derives its worth and derivative value from market wealth, that which is offered for sale in the market at a price, in money, set by supply and demand. The only source for new hard money that does not dissipate in inflation is profit since money is nothing more than congealed profit. As humans create profit, defined as the difference between the cost of producing market wealth and what a willing buyer in the market is willing to pay for it, the value of the exising money supply goes up. More market wealth means the fractional reserves of the banks need to increase and they pump out more new money to service the increased wealth — i.e., more money at a higher value gets created.
The obvious answer then is that Government, to serve its duty of creating and controlling a sound currency, has to start making a profit for the benefit of the poor. Sound and just and balanced redistribution and real social justice are then acheived based on equality of work, and welfare is eliminated, budgets are balanced and all with the really and historically effective tools of capitalism, now coopted and effectively applied at last by government. A profitable and productive and capitalistic government, with its new found profits, can by eschewing socialism at long last stop taxing everyone. And by this means the money supply can be expanded from the bottom up in a trickle up supply side Ascension that ends poverty, unemployment and unfair maldistributions forever. With this process we can stop shipping our factories and production, and the money we use to buy our crap, overseas. Anybody got a better solution other than the Bonaparte option?
In short: Capitalism works. Socialism sucks. The former creates money. The latter destroys it. (Money is created by profit. Money is destroyed by theft, charity, government waste and corruption, and mostly by taxes, all of which are key elements of socialism, the greatest anti-money philosophy ever).