Wednesday, August 10, 2011

The Requiem for the Welfare State

By Son of Bastiat

“When great evils happen, I am in the habit of looking out for what good may arise from them as consolations to us; and Providence has in fact established the order of things so that most evils are the means of producing some good” by Thomas Jefferson
Events of the past few days are rattling not just a few individuals, among them being those who worry about what the markets may be signaling about their job prospects (most recent graduates); the 50 or more million senior citizens who depend on (fixed) pensions and nothing else for their daily survival; and most heartbreakingly, the 15 or so million “lost” children, many of whom are orphans who have fallen back into the maws of poverty, innocent casualties of the on-going recession with nobody else to turn to for succor. These are the true victims of a welfare state that is in its last death throes; those who are tempted to think of the gyrating and plummeting indexes as ‘comeuppance” for rich folks’ unmitigated greed, need to be reminded that those lines are merely the visible images of the deep seated fears and anxieties of millions of ordinary folks who are getting caught in this visceral contest of ideas. The markets may rebound but the pains and sorrows will remain with these folks throughout their lifetimes.
That these cathartic events are still viewed with shock (and alarm) as if they were totally unexpected, as if there was any outcome other than what is now unfolding, is the outrage behind these. One detects it from what the politicians of the left and right are saying, but since lying and prevaricating is what all of them do in order to remain in power, they cannot be expected to say anything else. One would expect better from the media, but instead they have become purveyors of silliness and inanity, blaming the very messengers (but not the message) they should have welcomed if they were true advocates of what’s good for society. Caught on the wrong side at exactly the moment when history turned against the welfare state, but too proud to recant the nonsense they have been peddling lest they get exposed for incompetence and bias, they are now unable to execute an honorable retreat and thus have to engage in name calling and blaming their fallen idols who were just as clueless about what’s going on.
What, it may be asked, was so ineluctable with the fall of the welfare state (which stands for a society that depends on government assistance for much of its own survival)? The only true and honest (if politically incorrect) answer is that it was never meant to function as the safety net for the poor that social theorists and welfare advocates have romanticized for it. The welfare state which in his cold, calculating fashion the Prussian Chancellor Otto von Bismarck created back in the mid-1880s to win the hearts and minds of industrial workers in a bid to preempt his political opponents (the Socialists) from thwarting his ambitious schemes to unify Europe under the Northern German alliance, became the grandiose solution to a problem that did not then exist (at least not in Germany) or if it did, should have required more careful thought. From its creation and up to now the welfare state has been used to secure power, and like all flawed births, their midwives will never grasp the depravity of their creation.
With the advent of the Progressive Era the passage of social legislation increased the heavy hand of government in the welfare state. A State heavily involved in social reform is neither foreordained nor the only option available to society in caring for its less fortunate. In the Europe of the late 19th C. and America of the early 20th C. private beneficence and charitable institutions took up most of the burden of caring for the poor. It is strange to read how, during the Guilded Age, the sick poor in America were cared for in private hospitals supported largely by wealthy families and religious houses just like it was during the medieval ages. Only when politicians realized the huge vote drawing power of limitless government largesse did the State become the principal provider of welfare assistance. Not surprisingly, this period also saw the expansion of government, and inevitably the first time that income taxes were levied in American history. Even Bismarck would have been appalled at what became of his handiwork.
The design of the welfare state unfortunately collides with three harsh realities. One is that social spending which is unrestrained by limits and accountabilities eventually turn into a state of commons beset by a tendency to spin out of control. A second is that benefits too generously dispensed create and nourish a culture of entitlement and dependence that view attempts at reform as “unfair, mean-spirited and unjust” which effectively prevents self-correction. Because they make up such a huge vote rich constituency that politicians dare not ignore, these programs just keep growing regardless of constraints elsewhere. The last is that the welfare society is a resource consuming sector, dependent on the productive one for sustenance. Expanding welfare faster than the productive sector saps the latter of resources it needs to grow; worse, extracting the wherewithal through coercive taxes and regulations tend to impair the latter’s health. 
The welfare economy’s unsustainability would have become a reality over time but three forces that came in with the 20th Century accelerated its demise:
a). Internet and Web Technologies. These technologies leveled the playing field that used to be heavily dominated by big entities with capital, information and contacts. When opportunities can be found at the touch of a key, options multiply and the advantages and coercive policies quickly fade into nothing.
b). Globalization. When factors of production like knowhow and capital are free to move anywhere they are welcome, economic differences disappear, equilibrating towards the Law of One Price. There is no reason for US (or European) workers to be paid $ 45 per hour excluding benefits to do what laborers in emerging countries can do for a fifth of it, daily. Suddenly the rationale for a safety net is blown away.
c). Erosion of Work Ethic and Moral Values. There is no sense in denying what right thinking individuals have known but somehow glossed over for fear of being viewed as “woozy”: that societal deterioration usually follows a decline in its moral values. This is a view that is now finding confirmation in European and US work ethics that in part explains such dysfunctions as Medicare overuse and the housing crash.
When things as earth shaking as these do not register in the consciousness of a society and its leaders, the stage is pretty much set for a dramatic fall, usually after a series of warnings. One such warning was the crisis of 2008 which can be viewed as the denouement of a secular tendency towards economic volatility first manifested during the oil crisis of 1973. Another recent warning that has longer roots is the current debt crisis, a direct effect of the unsustainability of big public spending that began during the Great Society and New Frontier Eras and peaked with Obama. Soon the world will see the onset of the Great Contraction, itself a reprise of the Great Crash of 1930s. One would think that the politicians and thought leaders would have detected these warning signs and “connected the dots” especially in the wake of the Nov. 2010 elections which telegraphed that ordinary folks wanted a reset because the political economy was on an unsustainable path. Despite all these, how did they react to the recent crash that followed the US credit rating downgrade? Derision, name calling and blame gaming, with the odium reserved for groups that brought to the fore serious problems that nobody dared to raise.
None of this leaves conservatives off the hook. For their lack of sufficient social conscience and obsession with materialism, they have been just as guilty in exacerbating the social malaise that supplied liberals with the ammunition and passion to press for unbridled government spending. Most of their assistance comes in the form of superficial rather than meaningful programs to help the poor. But being the more pragmatic of the two camps, conservatives would, if they were incentivized, be more capable of helping at a scale and variety needed by the poor, with none of the liberals’ moral delusions and politicians’ manipulative-ness. By factoring in the cost of supporting social spending in their investment calculations, they can do a better job of designing sustainable welfare programs that run efficiently and without coercion, though this would still leave giving at their discretion, perhaps the price of freedom. The ideal is for such programs to be set at a percentage of economic benefits, in advance and automatically built in as a deliberate policy to support the poor. 
Until the revision of the economic structure takes place, the overriding problem of our times is how to help the poor without smothering their spirit and turning off that spark of innovation that makes charity a pleasant obligation to face instead of a burden to be evaded or imposed by fiat. Unless this is achieved, as Jefferson says in his quote, man has to suffer tremendously to figure out a reasonable way to do it. [VRR@NYC2011]

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