Belmont Club

Scylla and Charybdis

The Guardian quotes a source who says “this is only the beginning” as thousands of students marched through central London to “display their anger over government plans to increase tuition fees … a wing of the protest turned violent as around 200 people stormed  … the central London building that is home to Tory HQ … demonstrators shattered windows and waved anarchist flags from the roof of the building, while masked activists traded punches with police to chants of ‘Tory scum’.”

[youtube Jo7G3MMyFbc?fs=1&hl=en_US]

The cuts were part of an 81 billion pound cost reduction program by Conservative/Liberal Democrat coalition government, which combined with tax increases were supposed to wipe out a spending deficit of 105 billion pounds. Besides increasing university tuitions, it would also abolish 500,000 public sector jobs. But opposition to the plan emerged almost immediately. “Rachel Lomax and John Gieve, both former permanent secretaries at government departments, said this week that Osborne may find it hard to reduce spending by 81 billion pounds ($130 billion) a year by 2015 amid opposition to the cuts from voters and some politicians in the coalition government.” The British bureaucracy immediately defended itself by threatening to cut the most important services first, the so-called “Washington Monument Defense” in which cuts to parks are met by a plan to shut down the Washington Monument.

“Now that much more radical cost-cutting measures are required across government, my committee is gravely concerned about the ability of government to make efficiency improvements on the scale needed,” said Chairwoman Margaret Hodge, an opposition Labour Party lawmaker. “There is a serious risk that to reduce costs departments will rely solely on cutting frontline services.”

As the example of Greece showed, cutting long standing, though unaffordable welfare entitlements can result in widespread demonstrations and even riots. The alternative, which is keep funding government spending by borrowing was illustrated by Ireland, whose problems on the bond market have brought it one step closer to default. The Financial Times writes:

In the eyes of bond market investors, the prospect of an Irish bail-out, similar to that of Greece, is growing by the day. Yields on Ireland’s 10-year sovereign debt saw their biggest one-day surge since the launch of the euro on Wednesday, jumping more than half a percentage point to 8.64 per cent. …

This, traders said, forced Irish banks to sell government bonds as they scrambled to raise the cash to meet the new margin requirements, sending a shudder through the market. The latest market moves comes at an awkward time for Dublin and the rest of the eurozone as financial markets move to price in renewed fears that one of the peripheral countries of Ireland, Portugal and Greece could default on their debt.

Don Smith, economist at Icap, said: “Irish bond yields keep on rising and today was yet more bad news. Investor confidence has been shaken in Ireland and the move by LCH.Clearnet is a very bad sign. It is potentially a tipping point that the Irish may find difficult to recover from.”

Janet Daley argued that the Western welfare state is collapsing.  But before its successor emerges from the crisis Western societies have to thread their way between the anger of those deprived of their entitlements and the anger of those who will be taxed to pay for them. In the short run, however, the outrage of those who find they can no longer receive “free stuff” from the government will dominate. Even if the only way to prevent unlimited quantitative easing and to control the deficit is spending cuts, the new GOP majority in Congress will find plenty of pushback the moment any serious reducations are attempted. Congress can hardly do it alone.  The Spectator reports that the Republican governors, seeking to transform the even greater shift away from tax and spend policies into political clout, are proposing to go to Washington to figure out how to square the circle.

RICHMOND, Va. — Congressional Republicans have a mandate to stop President Obama’s spending spree and rein in the federal budget. But they have a plethora of plans to get it done. How best to sort them out and get to work?

On the day after the election Mississippi Governor Haley Barbour threw out the idea of having some state governors take an unusual direct role in crafting those plans. In a Friday interview in his Richmond office, Governor Bob McDonnell told me he thought that Barbour’s idea was a great one. Between the two — and with the help of other like-minded fiscal conservative governors such as New Jersey’s Chris Christie — congressional Republicans could be able to act before the mandate they received a week ago expires. And by doing that, they may buy enough time to achieve the long-term budget cuts our nation needs.

But even if the several States and the Congress jointly decide to put the brakes on spending the sheer momentum of the deficit is bound to start sparks flying once the rims are locked. Too many promises have been made that will now have to be broken. For example, California is borrowing $40 million a day just to pay for unemployment benefits. And it can’t afford it. So it is borrowing from the Federal government, which is in turn borrowing from the bond market. “The Los Angeles Times reports the state will have a $362 million bill for interest alone due on a total debt of $10 billion next fall.”

California is not alone here. 32 states in total have been borrowing from the federal government to pay unemployment benefits. The total is $41 billion. Some of these states are asking the feds for a deferral on repaying the loan until the economy improves.

The Welfare State is waiting to win the big lottery ticket or get word of an inheritance from a rich aunt. But the fact that it can’t go on doesn’t mean that it shouldn’t. The New York Times, while acknowledging the State’s financial woes,  recommends higher taxes. The Old Gray Lady pays lip service to spending cuts, but concludes that of course one can’t really make cuts at all. “The states, like the federal government, need to get control of spending. That may mean dealing with out-of-control pensions. It may mean careful cuts in services combined with, yes, higher taxes … with millions of people out of work, this is the worst possible time for the states to try to solve all their problems by simply slashing health care spending, spending on higher and elementary education, and services for the elderly and the poor.”

Can’t have that. But can’t afford it neither. And so the welfare state is back where it started, unable to support its spending and unable to stop spending. The truth is that pain, not hope, is coming: it will be forced on society by reality whether in the form of spending cuts or higher taxes. The gangrene has gone too far to be pushed back without some discomfort. And this means political conflict of which the riots in Greece and in London are but a sample. But as Larry Bell at Forbes notes, fiscal and monetary policy are not the whole story. Ultimately the productive resources of the nation have to be freed from the dead weight of leftist shibboleths and regulation. Describing California, Bell argued that it’s policies have tended to serve a few industries and the environmental left rather than the broad citizenry.

while California focuses on wind turbines, solar panels and electric cars, vast offshore oil resources remain undeveloped and nuclear power is ignored. Consequently, the energy-starved state’s employment and economic future is bleak. A 2009 Milken Institute study showed a recent loss of nearly 400,000 manufacturing jobs.

But to set that aright means even more conflict. That seems a given. What the collapse of the welfare state means is that the role of government in public policy must be fundamentally revisited. It is nothing less than a revolution in the making and we can only hope to see it through with the maximum civility.

[youtube NIGras8tr3o?fs=1&hl=en_US]


Tip Jar or Subscribe for $5