May 17, 2016

Macroeconomics and the Welfare State, Part 3

In recent years the welfare state has become a non-issue in both academic and public-policy literature. This is especially the case among its supposed critics: conservatives and libertarians. 

There are isolated exceptions. In academia, they are a dying breed; in public policy, Cato Institute Senior Fellow Michael Tanner is the most noteworthy of very, very few exceptions. Through a relentless stream of op-eds, policy papers and research reports, Tanner keeps the public aware of the big cost of our entitlement programs and reasonable reform ideas.

But not even Tanner can break through what seems to be a universally accepted premise among conservatives in the United States, namely that...

...the welfare state is here to stay. Prominent Republicans like House Speaker Paul Ryan (R-WI) appear to have conceded that the large, federal entitlement systems Social Security and Medicare are here to stay. While Speaker Ryan seems to be friendly to the idea of decentralizing control over other entitlements - namely the ones sponsored jointly between the federal government and the states - and let state legislatures have a big say in how they are run, the bottom line is still that those programs will remain part of the tax-funded American welfare state.

The evidence for the ignorance of the welfare state, both as a socio-economic systemic problem and as a macroeconomic ballast on the American private sector, is even more obvious if we look at the priorities made by the nation's most prominent conservative and libertarian think tanks. At Cato, there is at best one person in addition to Michael Tanner whose research is in any way related to the welfare state. At the Heritage Foundation the welfare state has become the fiscal behemoth in the room that everyone can see but nobody speaks about. The American Enterprise Institute seems to have gone the same way under its current president. Sadly, the welfare state is also basically ignored by the Hoover Institution, the Goldwater Institute, the National Center for Policy Analysis and the Manhattan Institute. 

And when was the last time the welfare state was the subject of a meaningful article in any of the prominent conservative political magazines?

Again, it does not suffice to, once in a while, take a cursory look at the cost of entitlement programs. That is not what the welfare state is about. The welfare state is a socio-economic organization principle, a system for directing and re-directing economic resources according to deeply held beliefs among its proponents. It is a system for using government to fundamentally transform a society over a long period of time and without the use of any other force than what peaceful legislation allows.

In order to grasp the true cost to our society of the welfare state, its critics must approach it with the same systemic methodology that welfare-state advocates have used since the 1930s. This is for the most part lacking entirely among conservatives and libertarians; the literature that critically analyzes the welfare state is typically concentrated on either of two issues: a relentless proposition of the application of Austrian economic theory; or reforms to isolated parts of the federal budget.

The latter issue tends to split equally between demands for tax cuts and demand for either blanket restraint in spending, or reforms to make existing programs more efficient. (Again, I want to credit Michael Tanner for going further.)

More is needed, though. The welfare state is a much bigger problem to us and the prosperity of coming generations than most people realize. The downshift in economic growth that began once the welfare state was fully developed was, initially, an "isolated" phenomenon; after having destroyed the economies of Argentina and a couple of other Latin American countries, the welfare state pulled Europe into a quagmire of macroeconomic under-performance. 

Unlike Latin America, the European welfare states for the most part remained peaceful and democratic, even as the economic price for big, redistributive government began eroding the prosperity of middle-class families. Europe's governments responded, primarily during the 1980s, with tax and spending reforms aimed at increasing growth and restraining expenditures. But austerity and isolated tax cuts (primarily in Britain) only bought Europe's welfare states time. The mechanisms in their welfare states that discouraged work and encouraged sloth and indolence remained in place. Eventually, time ran out again on the welfare states.

In practical terms, this meant that during the 1990s European countries started experiencing chronic budget problems. The fiscal problems, however, were widely misinterpreted as being transitory and curable with a comprehensive, super-state reform known as the European Union. After all, the EU included a balanced-budget requirement in its constitution (the Maastricht Treaty which later became the Lisbon Treaty) and the European Central Bank was constructed specifically to not print money to save fiscally failing governments. 

As is evident today, none of this turned out to be true. The balanced-budget requirement of the EU constitution proved to be entirely worthless when deficits opened up in the government budgets of Greece, Italy, Spain, Portugal, Ireland, France, the Netherlands, Britain... 

I will not go into detail about how Europe's welfare states mismanaged their budget crises in 2009-2011; I wrote an entire book about that two years ago. But let me be clear about the long list of mistakes that Europe's political leaders have made:

  • At every turn when the welfare state proved to be too costly for their taxpayers, governments did nothing to solve the underlying structural problem that is the welfare state;
  • Their reaction has been either to provide a patchwork solution or to pretend that the problem has another root cause;
  • As a result, GDP growth has slowed to its lowest average for any decade since World War II, with easily understandable consequences for the standard of living of Europe's working families;
  • Each new generation that leaves school to become productive citizens are faced with a higher price tag for the same standard of living as their parents have enjoyed - in other words, kids are becoming poorer than their parents.
Add to this the universal political acceptance of the welfare state among Europe's conservatives, and the picture is undeniable: Europe is not going to get out from underneath its self-imposed, structural burden. The continent is doomed to a future of industrial poverty.

So long as American conservatives and libertarians continue to ignore this systemic price of the welfare state, the United States will continue to inch closer to the European quagmire. The Obama presidency is full of alarm clocks going off, though not all of them are his fault. The complete absence of three-percent growth during his White House tenure is only partly his fault - it is the logical consequence of the welfare state that presidents all the way back to FDR have contributed to. 

It is, in short, the most obvious price we are paying for wanting, accepting or tolerating the welfare state.

Quo vadis, America?

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