Tuesday, May 11, 2010

The Welfare State's Death Spiral


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. 

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.end quotes.

Though the 1 trillion dollar bailout by the European Union and the IMF will reduce problems for 5 to 10 years if we are lucky. The level of entitlements in Greece and elsewhere in Europe likely will at some point come back to haunt both them and us. It is unlikely that the Greek Government will be able to get away with reducing entitlements enough to work long term for their country economically more than 10 years. It is sort of like the problem in the United States with Social Security and Medicare long term. In the case of Social Security especially no one has expected Social Security  to be there even now who has actually studied how it has been funded and how Congress kept borrowing money from the fund for other things throughout the years without ever paying it back.  If you keep borrowing money from your retirement acccount it is not there when you actually need it.

So there has to be a way to rethink this whole thing in regard to entitlements worldwide. Money doesn't magically just come out of the air. If a government sets up a program that  isn't properly funded long term the program eventually collapses no matter what magical thinking politicians want to tell their constituents to get elected worldwide.

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