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Samuelson: Death Spiral Of The Welfare State

Is the failure of the great Keynesian experiment in public spending and government intervention in national economies about to get some traction in the popular media? In other words, are the alphabet media dupes at ABCNBCCBSCNNWPTIMENWMSNBC finally figuring out what people that used to read and watch them began to intuitively understand years ago? An article by Robert J. Samuelson in the Washington Post today suggests that there may be hope. Unfortunately, it required a crisis in Europe, and specifically, riots in Greece, to summon his plain English explanation of what plagues not just the US economy but European economies also. Some in the poular media are coming to understand what Margaret Thatcher warned us of decades ago: socialism works well until it runs out of other people's money to spend.

The European Union is putting that opinion to the test now with their trillion dollar version of TARP.

Markets rallied around the world in response to the extraordinary show of solidarity in defending the euro, which topped even the U.S. government's support for its collapsing financial system in 2008. A broad index of European blue chips closed up more than 10 percent and Wall Street was up more than 3 percent in afternoon trading.

But analysts pointed out that the package did nothing to reduce overall debt -- it just spread it onto more shoulders.

There will also be a risk that, by in effect shielding Greece, Portugal, Spain and other over-indebted countries from the harsh verdict of the open market, the measures will make it harder for political leaders to overcome public resistance to the deep budget cuts needed to get spending and borrowing under control. Strikes in Greece led to a riot last week that left three people dead.

And therein is the problem. The EU marched in with a large band aide today when the patient required an amputation. I might say that response is both uniquely Keynesian and European but that would not be true. The United States has done the same thing by refusing to address the root problems of excessive government spending. As Samuelson notes:

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 over borrow 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 European "financial contagion" is spreading. Look for quarantines between states in the U S soon.

Note: Frequent commenter Brett made this connection earlier.



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Comments (9)

I would claim plagiarism of... (Below threshold)
Brett:

I would claim plagiarism of my post earlier today below ("downward spiral...", but it's so obvious than ANYONE with basic reasoning skill could come to the same conclusion. Sadly, that leaves out the majority of the current legislative and executive branches.

So, socialism doesn't work.... (Below threshold)
GarandFan:

So, socialism doesn't work. Now who'd a thought that would happen?

Apparently Barry hasn't fig... (Below threshold)
914:

Apparently Barry hasn't figured it out yet.. I guess he is as dumb as they come.

socialism works we... (Below threshold)
_Mike_:
socialism works well until it runs out of other people's money to spend

And all 'the package' did for Greece was tap into another source of other people's money via the EU. The problem hasn't been fixed, it's been deferred... much like the politicians in the U.S. are doing.

The source of the problems in Greece wasn't from insufficiently high taxes. It's from excessive, unsustainable government spending... much like the politicians in the U.S. are doing.

The problem is analogous to a plane with its nose pitched downward and all the 'bail outs' do is add a little altitude without correcting the real problem - that your plane is in a nose dive.

And all 'the packa... (Below threshold)
Brett:
And all 'the package' did for Greece was tap into another source of other people's money via the EU. The problem hasn't been fixed, it's been deferred...

Of course. The only way out (short of cutting programs) is if growth is sufficient to outpace the servicing the of the debt - which it won't because the nature of the spending also cripples the economy. The last time things were this off-kilter was in the Weimar Republic. That worked out great for everyone, huh?

I have no doubt Samuelson i... (Below threshold)
Jim Addison:

I have no doubt Samuelson is correct, but these death spirals have a way of taking an awfully long time.

The typical reaction of governments who have wagered the farm on "social safety nets" (or whatever euphemism for the welfare state is now fashionable) is to double down - which is why we've been seeing bailouts all over the place the last few years.

When it comes down to either making the hard choices or arranging to postpone the day of reckoning, even if delay only makes the eventual accounting worse, they choose to kick the can down the road EVERY time.

When the euro quickly began... (Below threshold)
Oyster:

When the euro quickly began to gain traction against the dollar several years ago I told a friend that it wouldn't last; that it was too quick and the attitude in Europe too euphoric over it. Aside from the whole welfare state mentality, they weren't exercising much caution at all. In fact, it took them way too long (and I'm not sure they've still done much) to do some of the basics like updating counterfeit laws.

Remember when Saddam was making noise about trading oil with the euro? Some were giddy over the idea of dumping the dollar. There was more than just moral outrage involved when some countries decided not to become involved with the US when we invaded Iraq.

But, but then the only othe... (Below threshold)
Emerson:

But, but then the only other options would be some form of Capitalism, and we can't have that. It doesn't recognize victim cultures and the needs of the arts and scholarly classes.

Note that I never meant to ... (Below threshold)
Brett:

Note that I never meant to imply or suggest any actual plagiarism! I though it was funny that numerous people even in the same small forum coincidentally came to almost the same phraseology at virtually the same time. The funny (or sad) bit being that I would be willing to wager that half the Earth's population would come up with something equivalent to "downward spiral", given the facts and basic reasoning skills. The sad or frightening part being that *none of those people are pulling any of the strings right now*.

So apologies to all involved if it seemed otherwise, and I will be more careful to make my point more clear in the future.




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